Warning: Don’t Count On This 13% Yield for Long

It’s easy to see why investors would be attracted to a stock with a 13.7% annual yield that trades 20% below book value.

This week’s Safety Net stock trades at $7.58, well below its third quarter book value of $9.59. That means if the company were liquidated, shareholders would receive $9.59 per share. So the stock is trading at a significant discount to its book value.

But it’s that yield that gets income investors’ juices flowing. However, I wouldn’t count on that for long.

CYS Investments (NYSE: CYS) invests in mortgage-backed securities.

[ad#Google Adsense 336×280-IA]In the first nine months of 2015, the company generated $136 million in net interest income, while paying out $106 million in dividends.

That comes out to a payout ratio of 77%, which is just slightly above my comfort level of 75% or lower.

However, net interest income is lower than it was last year by about 6% and, should the Fed raise rates as everyone expects, income could head lower still.

In the company’s third quarter earnings release, management said that if the Fed raises rates, it will increase CYS Investments’ borrowing costs and will hurt its net interest spread.

The spread is the difference between the rates at which CYS Investments can borrow money and invest it. If borrowing costs go higher without the return on its investments moving in lockstep, the company will generate less income.

If CYS Investments had a stellar track record of keeping its dividend stable, I might be a little less concerned, at least in the near term. But, look up the definition of a dividend cutter in the dictionary and you’ll see a picture of CYS Investments.

Since October 2009, the company has raised the dividend four times while cutting it eight times, including in each of the last two quarters.

The current dividend is the lowest it has ever been.

You can see from the chart below that whenever management boosts the dividend, it takes back that increase rather quickly.

And other than a big $0.92 dividend paid in December 2012, the dividend has steadily eroded.

Between net interest income on the decline, management expecting tighter spreads when interest rates climb, and a history of hacking the dividend, there is no reason to think that CYS Investments’ dividend is safe.

I’d be shocked if it isn’t reduced again in the next 12 to 24 months.

Dividend Safety Rating: F

Hoping your longs go up and your shorts go down,



Source: Wealthy Retirement