It’s not often that I am bullish on a company whose SafetyNet Pro rating is an F. But that is the case with Annaly Capital Management (NYSE: NLY).

SafetyNet Pro analyzes the likelihood of a dividend cut.

I don’t like dividend cuts. In fact, I despise them…

So much so, that if any company that is recommended in my Oxford Income Letter portfolios lowers its dividend, we sell immediately. The portfolios in The Oxford Income Letter are designed to generate rising income so that, each year, investors get paid more than they did the year before.

If a company reduces its dividend, that detracts from the goal of ever-increasing income.

So a dividend cut means removal from the portfolio.

If that’s the case, why in the world would I have recommended Annaly last summer if SafetyNet Pro rates it an F?

What Is SafetyNet Pro?

SafetyNet Pro is a groundbreaking tool that predicts dividend cuts and raises with stunning accuracy. With it, you can determine the dividend safety rating of nearly 1,000 stocks. Access to SafetyNet Pro is reserved exclusively for subscribers of Marc’s newsletter, The Oxford Income Letter. 

First off, subscribers are glad I did, as the stock’s return since June of last year is more than 26%.

Annaly is rated an F for dividend safety because it has a history of lowering its dividend.

In previous years, Annaly had a variable dividend policy. Some quarters, it was up significantly… others, it was down sharply.

SafetyNet Pro penalizes companies for cutting their dividends on the thesis that a management team that is willing to lower the dividend once will do so again if times get tough.

Today, however, management has made the dividend more reliable. The company has paid a $0.30 per share quarterly dividend since December 2013, giving the stock a 10% yield.

Annaly is a mortgage REIT. It makes money by borrowing at short-term rates and lending at long-term rates. The difference between the rates is the spread. When the spread is wide, Annaly (and other mortgage REITs) make more money. When the spread is narrow, it makes less.

Over the past several years as interest rates have come down, the spread has tightened. That has constrained Annaly’s net interest income (NII), which is the best way to measure a mortgage REIT’s ability to pay its dividend. It’s the closest thing to cash flow for a mortgage REIT.

Because of the tight spreads, NII has been steadily falling – another reason the stock is penalized by SafetyNet Pro.

NII is projected to decline again in 2017, but begin climbing next year.

Though NII has been slipping, last year, the company still generated enough to pay its dividend. Annaly paid $1.22 billion in dividends, while NII totaled $1.55 billion.

Annaly gets an F because NII has been going in the wrong direction over the past few years, and the company has cut its dividend when it had a variable dividend policy.

I’m still bullish on Annaly because NII is expected to rebound next year. And as interests rise, the spread should widen, generating more income for Annaly and its shareholders.

Dividend Safety Rating: F

If you have a stock whose dividend you’d like me to analyze, leave the ticker in the comments section.