NEW YORK, NY--(Marketwire - Dec 7, 2012) - Real Estate Investment Trusts (REITs) by law are required to pay out a minimum of 90 percent of their taxable income through dividends. A dividend tax increase has been a major concern for investors as current top tax rate is set to expire in the New Year. Five Star Equities examines the outlook for dividend yielding companies and provides equity research on ARMOUR Residential REIT, Inc. (NYSE: ARR) and CYS Investments Inc. (NYSE: CYS).
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The current top tax rate on dividends, which was set in the Bush-era, will expire in January. If lawmakers fail to take action dividends will be taxed at the same level as wages and salaries in 2013. President Obama's plan would see the top tax rate on dividends rise to from 15 percent to 39.6 percent for high-income earners, which doesn't include the new 3.8 percent tax on investment income added by Obama's health-care law. Since mREITs are already taxed as ordinary income they are likely to see just a slight increase in taxation, compared to almost triple for other high yielding companies.
"The prevailing fear is that if taxes for dividends increase, dividend yielding companies could grow less attractive and could see a multiple de-rating," said Savita Subramanian, a strategist at Bank of America Merrill Lynch.
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ARMOUR's residential mortgage backed securities portfolio consists of hybrid adjustable-rate, adjustable-rate and fixed-rate residential mortgage-backed securities issued or guaranteed by U.S. Government-chartered entities. The company offers investors an annual dividend of $1.08 per share for a yield of approximately 15.5 percent.
CYS Investments is a specialty finance company that invests on a leveraged basis in residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. The company offers investors an annual dividend of $1.95 per share for a yield of approximately 15.25 percent.
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