Yay or Nay? CYS Investments, Housing Market and New Dividend Taxes

Jan 15, 2013, 10:03 ET from National Traders Association

NEW YORK, January 15, 2013 /PRNewswire/ --

The REIT industry, including CYS Investments has been faced with a series of challenges in the past months. How will the major dividend tax increase in 2013 affect the industry and can gains within the housing market offset any net concern?

The effects of leverage are becoming apparent as CYS Investments, Inc. (NYSE: CYS) [Full Research Report][(1)] is realizing slightly increased effects of the surrounding industry conditions One of the major concerns in the forefront of many investors is the upcoming dividend tax increase, and how it plays into their individual investments.

"The prevailing fear is that if taxes for dividends increase, dividend yielding companies could grow less attractive," a strategist at Bank of America said. The good news is that mortgage REITs are already taxed 90 percent of their taxable income through dividends, and are likely to have only slight increase in taxation, compared to almost triple for other investments.

Despite generous dividends, prices for mortgage REITs struggled in Q3 and Q4 of 2012. Demand for mortgage securities rose, yields fell, and the mortgage REITs' earnings declined. CYS Investments had an empty slush fund and returns were weak, suffering a price decline of approximately 20 percent. However, due to its leveraged position, a turn in the industry could mean a turn in tides for CYS.

In 2013, mortgage REITs are expected for a comeback, primarily due to higher taxes on dividends and capital gains for upper-income earners, making the investments on mortgage REIT more appealing. Companies in the REIT industry don't pay corporate taxes and are not qualified for the lower dividend tax rate. Furthermore, a big portion of REIT dividends, specifically those of CYS Investments, consists of return of capital, reducing the investor's taxable income in the year the dividend is received, thus lowering the cost basis of the investment and defers taxes until the investment is sold. CYS Investments is a major player in the mortgage REIT sub-industry; and this good news will definitely be advantageous to the company.

CYS Investments will be able to bounce back to the top, thanks to the government's interest rate policy that allows REITs to borrow money very cheaply and profit from buying large interest rate spreads on long-term MBS (mortgage-backed securities). As of January 14, 2013, the company's market cap is $2.126 billion, categorized under mid-cap.

CYS Investments was in a tight situation during the last half of 2012; but 2013 holds a promise to bring back to the dividend yielding mortgage REITs their glory days, thanks to the dividend tax increase. REITs are expected to become attractive investments in 2013 and the years to come. Now that all dividends will be taxed at the same rate, REITs will now be at the same level with other investments in terms of tax rates, and may even be on the stronger end due to their high dividends.

Reference Links:

[(1)]   The Full Research Report on CYS Investments, Inc. - including full detailed breakdown, analyst ratings and price targets - is available to download free of charge at: [http://www.nationaltradersassociation.org/r/entire_report/454b_CYS]

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SOURCE National Traders Association