So, the future for CYS Investments Inc (NYSE:CYS) lies in a re-balancing activity that better suits the prevailing rising interest rates environment. This activity should involve getting rid of some of the 30-year fixed rate Agency paper. This should cap some of the declines in the book value. On the other hand, it could dampen some of the interest income for CYS Investments. To partially offset this, the company should increase its exposure in the 15-year MBS.
For CYS Investments, cash dividend coverage ratio is not appropriate as operating cash flows for the company have remained negative over the past 3 years. So, its obvious that CYS Investments used equity and debt financing to payout its dividends.
Capstead Mortgage Corporation (NYSE:CMO) is another mREIT that has disclosed its performance for the second quarter. The company invests exclusively in adjustable-rate Agency MBS. It’s because of the design and structure of its investment portfolio that Capstead reported only a 5.9% sequential decline in book value. However, the company also reported a 15 bps decline in its net interest spread. I believe the strategy being followed at Capstead is the safest and the most preferred. Adjustable-rate securities provide cushion to book value erosion while providing higher yields as MBS payments adjust to more current rates. Therefore, I am bullish on Capstead Mortgage.
Capstead Mortgage Corporation (NYSE:CMO) maintained a cash dividend coverage ratio of 1.5 times over the last 3 years, which means the company generated 1.5 times more cash from operations than it had to payout in dividends. So, I believe its dividends are sustainable.
Conclusion
We saw how the boost in top and bottom lines is not sufficient for dividend sustainability for Arlington Asset Investment Corp (NYSE:AI). It is not generating enough cash from its regular operations, which is why I believe a dividend cut is around the corner. So, investors should not be fooled by the current yield of 13.6%. Meanwhile, its peer CYS Investments reported a significantly higher decline in its book value and has been supporting its shareholder distributions through equity and debt financing. So, Capstead Mortgage is the most preferred mREIT among the ones being considered in this investment thesis as I believe its dividends are sustainable through its regular operations.
Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Don’t Be Fooled By This 13.6% Yielding Stock originally appeared on Fool.com and is written by Adnan Khan.
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