Source: CYS Investments.

Low interest rates have plagued income investors for years, and many of those seeking larger yields from their investments have moved away from traditional fixed-income investments like bank CDs and bonds. Instead, many have looked at real-estate investment trusts like CYS Investments (NYSE:CYS) that focus on mortgage-backed securities, as they're some of the few remaining choices available to get double-digit percentage yields. But many investors are concerned about what could happen to CYS and similar mortgage REITs if interest rates start to rise. Is CYS Investments' yield too good to be true? Let's take a closer look at CYS Investments by doing a dividend payout ratio analysis to see if investors will be disappointed in the long run.

Dividend Stats on CYS Investments

Current Yield


Current Annualized Dividend Per Share


Earnings Per Share, Trailing 12 Months


Earnings Payout Ratio


Source: Yahoo! Finance.

Should investors in CYS Investments worry about their dividend payments?
If you don't know much about real estate investment trusts generally and mortgage REITs in particular, then just looking at how much CYS pays in dividends versus how much it earns could lead you to conclude that the REIT's payout is completely unsustainable. CYS has almost no margin of safety to withstand a slowdown in earnings without potentially eating into its ability to sustain its dividend at current levels.

Indeed, those worries were in part justified by what CYS Investments had to do following its third-quarter results. Net income for CYS plunged sequentially, and even though most of the drop in net income came from unrealized losses on investments, offset in part by realized gains on investments as well as unrealized losses on derivative contracts, core earnings still continued their downward slide from earlier in 2014. As a result, CYS cut its dividend for the quarter by $0.02 per share to $0.30.

Part of the problem that CYS faces is that it has to deal with competition from the Federal Reserve in the mortgage-backed securities market. Even though the Fed has stopped adding new money to its quantitative easing program, it is still taking the $1.7 trillion in mortgage-backed securities that it has on its balance sheet and reinvesting proceeds from maturing securities into new mortgage-backed investments. That in turn raises the prices that CYS has to pay, cutting into its profit spread and thereby reducing interest-related income and overall earning power.

Source: CYS Investments.

Despite the Fed's continued participation in the market, many investors fear rising rates and the impact they could have on CYS and similarly situated mortgage REITs. Since the beginning of 2014, CYS has taken steps to reduce its sensitivity to interest rate increases. Yet to do so, CYS has had to give up potential upside from possible reductions in rates, and that conservative approach could end up costing shareholders if the bond market once again surprises investors.

It's important to realize, though, that REIT dividends are in large part determined by federal tax law. In order to qualify for REIT status and thereby avoid double taxation at the corporate level, REITs have to pay out at least 90% of their income in the form of dividend distributions. That requirement forces nearly all REITs to have uncomfortably high payout ratios based on earnings. But when you use non-GAAP measures to evaluate different REITs, it can give you another look at the relative health of their dividends.

Looking back at history
There's a far better reason than CYS Investments' payout ratio for investors to be scared of its future dividend policy: just look back at history. Over the past three years, CYS has slashed its dividend by half, with nickel-per-share reductions twice in 2010 and once in 2011, followed by an even larger cut in early 2013. Long-term shareholders have seen their share prices fall dramatically, even though those who took their dividends in cash have fared reasonably well over the long run on a total-return basis.

Overall, CYS Investments will continue to have to deal with the same challenges as other mortgage REITs, including interest rate volatility and constrained supplies of attractive mortgage-backed securities in which to invest. Further dividend decreases are indeed possible at CYS, but with such a high dividend yield, it's entirely possible that total returns over the long run will end up being attractive enough to beat most lower-yielding alternatives.