Double-Digit Return On CYS Investments Even Better

Jul.15.14 | About: CYS Investments, (CYS)

Summary

CYS to pay dividend on July 16, 2014.

Dividend return 14% and opportunity to receive better return.

CYS stock price is down, and now is a great buy-in opportunity.

Interest Rate Risk effects and profitability.

CYS Investments, Inc. (NYSE: CYS) will pay its dividend of $0.32 per share on July 16, 2014. The stock price the day before the ex-dividend date on June 19 had a high/low of $9.18/$9.11. This put the yield at 14%. Since the ex-dividend date, the stock price has dropped to a low of $8.62.

The company has paid $0.32 or $0.34 over the last 6 quarters, and with the steady markets and no sudden change in interest rates, this level of earnings is expected to remain constant in the near future.

The opportunity now exists to buy CYS Investments and receive a higher return over the next 90 days. With the stock price moving in the $8.60s to $8.70s, the annualized dividend yield return would be higher. Always buy on the downside and ride the price up. We can see the 90-day cycle, and this provides an excellent opportunity to improve our return on our investment.

Interest Rate Risk: The Federal Reserve Board has stated their goal to stabilize the markets and allow for a continued growth in the economy. Their current position of very low interest rates and the continued reduction of buying less government bonds have maintained a positive force in the longevity of this stable period for investment companies. The Board may discontinue buying bonds in October, 2014. The Board has stated their goal to focus on the economy and will adjust as needed, but since Janet Yellen has been the Federal Reserve Chair, there have been no major adjustments to the policy.

The interest rates are not expected to go up in 2014, but the Board has discussed the possibility of increases in 2015. This will impact all companies in the financial markets, as many borrow huge sums (read millions or billions) to finance their operations. The increase of ¼ of 1 percent would raise the cost of money and affect their income statements. Many companies like CYS Investments have hedge investments to soften the effect, but there is still an adjustment period to the new rates.

CYS Investments has a portfolio with some hedges that will manage the effects; as the company moves forward into 2015, it will continue to observe the Fed's comments and actions and adjust its portfolio as it requires.

Increasing interest rates are not bad. The higher rates will allow the company to have a higher profit margin in its portfolio and increased profits. It is the adjustment period that will be financially challenging during that time. It is not a question of "if it will happen, but when".

Stock prices will initially drop when the Fed allows interest rates to rise, but will settle, and investors should see stock prices appreciate after the increase in rates stabilizes. Over time, we could see the dividends increase as well.

There are two methods of investing in CYS that we recommend. First, the buy and hold, which allow you to receive quarterly dividends that currently pay over 14%. With the stock price down after the ex-dividend date, now is a great time to buy in.

The second method is to buy the low, which means buying in after the ex-dividend date and riding the stock price up to just prior to the next ex-dividend date in September (the exact date has not been announced), and selling a few days before that date. The stock price has dropped more than the dividend amount, and your return if you choose this method earns you a higher return, with a little more work. Both provide you with over 14% return, and you can take the cash or reinvest to grow your portfolio faster.

We recommend CYS Investments Inc. as a buy and hold. We do recommend investors watch the Federal Reserve Board for their action to allow interest rates to rise. There will be effects, just too many variables to determine the outcome. Even after the rates go up, CYS Investments will be a solid dividend producer.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.