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Chimera Investment Corp (NYSE:<a href='http://seekingalpha.com/symbol/cim' title='Chimera Investment Corporation'>CIM</a>)It was a quick transaction and while investors were momentarily stunned, it appears that Credit Suisse (NYSE:CS) pulled it off without a hitch! Last week, Chimera Investment Corp (CIM) announced that it would sell 85 million shares of stock to the public and named Credit Suisse as the sole underwriter for the transaction. Initially the stock traded sharply lower as investors feared dilution to their ownership of the REIT. After all, CIM sold the shares at a price of $3.61 which was roughly 7% below the closing price Wednesday afternoon when the announcement was made.

But the current market is quite resilient and CIM managed to rally throughout the day and actually close higher – a strong sign of demand for the stock. Investors obviously believe that CIM will be able to put the capital to work effectively and generate a profit on this new capital. While management certainly could have borrowed the money and used its available leverage to purchase these securities, I am pleased that management opted for permanent capital rather than leverage which can wreak havoc when economic periods are difficult.

Investors in CIM are currently counting on the high dividend rate as their primary return for owning the stock. Dividend payments are largely variable as they are linked directly to the operating earnings for each particular quarter. But with a very low cost of capital, and meaningful cash flow from mortgage securities, CIM has been able to pay a dividend yield north of 15%.

While management states that their primary goal is to produce attractive dividends with capital gains as a secondary objective, I am much more interested in the potential for the stock to trade significantly higher. As investors realize that the dividend payment is safe (which will likely happen as a function of the company continuing stable payouts), investors will be willing to pay more for this stable cash-flow security.

As demand rises, the price of the stock should trade significantly higher. In this market, a yield of 6% or 8% is still very attractive, and if CIM traded up to a place where the yield was 8%, the price would be roughly $7.50 per share – good for a 92% increase (all the while, investors are still receiving the dividend payments)

I should note that the ZachStocks Newsletter has a pending position in CIM to buy once the stock breaks out of its current range.

The attractive dividend yield also functions to implement a floor under the shares because as the stock trades lower, the dividend yield only becomes more attractive. Fund managers looking for attractive value will quickly zero in on the strong dividend yield and likely begin to place large buy orders.

Playing the devil’s advocate, Chimera could potentially come under pressure if mortgage securities take a nose dive. According to this Financial Times article, BlackRock Recently warned that banks would have to take losses on distressed mortgages. There is speculation that now that the Fed has wrapped up its monumental program to buy mortgage securities, that the market for these assets could dry up. And then there is the danger of write-downs as homeowners either cannot or will not (see the weekend piece on strategic defaults) pay mortgages on houses where they owe more than the home is worth.

But even with these risks in play, CIM has already taken significant write downs on its existing non-agency mortgages and is carrying them at nearly 50 cents on the dollar. It would take a very nasty economic reversal for these securities to be re-priced lower, and the potential for actual appreciation in the mortgage portfolio is good. Now that CIM has additional capital to put to work buying attractive opportunities, the returns on existing and new mortgage holdings has the potential to even increase the dividend payment which makes the buying argument even stronger.

With such positive trading after what could have been perceived as a dilutive transaction, I have more confidence in this position. Continue to look for opportunities to accumulate shares as management effectively invests and generates strong operating earnings.

Chimera Investment Corp (<a href='http://seekingalpha.com/symbol/cim' title='Chimera Investment Corporation'>CIM</a>)

Full Disclosure: Author has a long position in Sound Counsel portfolios

Source: Chimera Raises Capital for RMBS Purchases