Annaly Capital Management’s Series F Preferred Stock: A Dividend Deep Dive Amid Shifting Rates

The recent declaration of a $0.5971 dividend for Annaly Capital Management’s 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (NLY.PRF) highlights both its income-generating potential and the complexities of investing in floating-rate preferred securities. With this payout, investors receive an annualized yield of 9.37%, but the path to that return is tied to evolving interest rate dynamics and the broader health of Annaly’s mortgage-focused business.

The Dividend Mechanics: SOFR and Spreads

The Series F Preferred Stock transitioned from a fixed 6.95% dividend rate (in effect until September 30, 2022) to a floating-rate structure based on the three-month CME Term SOFR (Secured Overnight Financing Rate) plus two components:
- A spread adjustment of 0.26161% tied to the dividend determination date.
- A fixed spread of 4.993%.

The latest dividend announcement, made on May 8, 2025, reflects this formula, yielding a quarterly payout of $0.5971, or $2.3958 annually. This rate marks a slight dip from the first quarter of 2025, when the dividend was $0.5990, underscoring the volatility inherent in floating-rate securities.

Current Yield and Market Price

The stock’s recent market price of $25.57 (as of May 2025) represents a 2.28% premium to its $25.00 liquidation preference. At this price, the current yield (annualized dividend divided by market price) is 9.37%, which is compelling for income-focused investors. However, this yield is contingent on the stock’s price remaining stable. A drop in price would lower the yield, while rising rates could pressure both dividends and share value.

Historical Context: Dividend Trends and Risks

The Series F Preferred Stock has seen notable fluctuations since transitioning to a floating rate. For instance:
- In November 2024, the dividend was cut by over 3%, from $2.65 annually to $2.46, as rising rates and spread adjustments reduced payouts.
- The 2025 dividend trajectory shows further variability, with the Q2 payout slightly lower than Q1’s, reflecting shifts in SOFR and Annaly’s cost of capital.

Investors must weigh this volatility against the security’s cumulative dividend structure (missed payments accumulate) and its redeemable feature, which allows Annaly to call the shares at par ($25.00) starting September 30, 2022. While the stock remains callable, its current premium suggests market confidence in its ability to sustain payouts.

Key Risks to Monitor

1. Interest Rate Sensitivity: SOFR’s trajectory will directly impact dividends. A sustained rise in rates could increase payouts but may also pressure Annaly’s net interest margin, as its mortgage-backed securities portfolios are rate-sensitive.
2. Redemption Risk: If Annaly redeems the shares, investors could face reinvestment risk at lower yields.
3. REIT Compliance: Annaly, as a REIT, must distribute 90% of taxable income. Regulatory or operational challenges could constrain dividends.

Comparisons and Investment Thesis

The Series F Preferred Stock’s 9.37% yield compares favorably to broader preferred stock indices, such as the iShares U.S. Preferred Stock ETF (PFF), which yields around 5.5% as of May 2025. However, this premium comes with higher risk.

Investment Takeaways:
- Bull Case: If SOFR stabilizes or declines, dividends could remain supportive, and the stock’s premium to liquidation could hold. Annaly’s expertise in mortgage markets provides a competitive edge.
- Bear Case: Further rate hikes or a slowdown in prepayment activity could squeeze margins, leading to lower dividends and price erosion.

Conclusion

Annaly’s Series F Preferred Stock offers a high-yield opportunity for investors willing to navigate interest rate risk. With a 9.37% yield and a 2.28% premium to par, the stock is attractively priced relative to fixed-rate peers. However, its floating-rate structure means returns are tied to macroeconomic trends.

For income investors with a medium-term horizon (1–3 years), the Series F could be a strategic holding, particularly if SOFR stabilizes. Those with shorter horizons or low risk tolerance should proceed cautiously, as rising rates or a redemption event could disrupt returns.

In a landscape of low-yield alternatives, Annaly’s preferred stock stands out—but its success hinges on balancing rate exposure with the company’s ability to manage its mortgage portfolio.

This analysis synthesizes dividend mechanics, market context, and risk factors to guide informed decisions for investors considering Annaly’s Series F Preferred Stock.