Whether the market is moving up or down, real estate investment trusts (REITs) can provide benefits to investors in the form of either growth or income. While there are a number of good buys in the REIT niche today, one of my favorites in this particular sector is Chimera Investment Corporation (CIM).
In this article, I will explain why I really like Chimera based on its high dividend yield as well as its future growth prospects. In addition, for those who are seeking a hedge against inflation, adding a good solid REIT such as Chimera can offer even more benefit.
Analyzing the Fundamentals
Chimera operates as a REIT in the U.S. by investing primarily in residential mortgage-backed securities, as well as residential and commercial mortgage loans, and other real estate related securities. One of this REITs targeted asset classes is agency and non-agency residential mortgage backed securities (RMBS).
While some investors may steer clear of REITs that consist of a high percentage of non-agency backed securities - in this case they make up nearly 75% of Chimera's portfolio - the added risk can have the potential to turn into additional reward. With a current dividend yield of roughly 16% and a 5-year average dividend yield of nearly 13%, Chimera has been consistent in paying its investors well.
One thing that investors need to be aware of, however, is that due to a change in the company's auditor, its 2011 year-end results are being delayed. This delay can make it difficult to get a grasp on the exact performance of the REIT. Some see this as a sign of impending bad news, yet it has not seemed to negatively alter the shares' current performance.
Although Chimera may be considered by some analysts as being somewhat risky, this could also be due to the stock's somewhat higher beta of .84, almost forcing it to trade more in line with the overall market - and this can actually be a good attribute when the market is moving upward. In addition, the mREIT structure mandates that these entities distribute 90% of its taxable income as dividends - making them a great hedge for when the market moves lower.
Analyzing the Competition
Another REIT with attractive qualities is Annaly Capital Management (NLY). This stock is currently offering investors a dividend yield of just below 14% with a strong quarterly revenue growth in excess of 29%.
This REIT has a focus on owning, managing, and financing real estate related investments, including mortgage pass-through securities. Since 2007, Annaly's earnings per share have risen from $1.57 to $2.57 in 2011. With a beta of just 0.23, these shares are not quite as volatile as Chimera, making Annaly a nice portfolio addition for those who are also seeking to reduce risk.
Over the past couple of months, Annaly has outperformed the rest of the market, being up 5% while the S&P is down by roughly the same percentage. And, due to the way that Annaly makes its money by leveraging short term and long term interest rates, additional economic recovery should put this company is a great position as long-term rates rise and short-term rates continue to stay at or near 0%.
Cypress Sharpridge Investments (CYS) is yet another strong player in the REIT arena. The company offers investors a dividend yield of over 15%. Over the past few years, CYS has provided investors with a total annualized return of over 12% - assuming that dividends have not been reinvested - a fair assumption given that many income seeking investors take receipt of their dividend payments.
Due to the company's strong management team along with its reputation for managing risk well, the shares have been given a rating of "outperform" by Wells Fargo. CYS's earnings per share estimates for 2012 are $2.23 and similarly $2.21 for 2013.
For investors who are intent on both growth and income in the area of REITs, ARMOUR Residential REIT (ARR) is another good possibility. It too boasts a high dividend yield in the range of 17%. The firm recently announced a public offering of an additional 30 million common shares.
The company's net income has been steadily rising and has actually doubled over the past two years - from $18 million in 2009 to approximately $40 million in 2011 - leading me to feel that this, too, would be another great pick for any investor seeking both growth and income from their REIT shares.
The Bottom Line
Based on the decision by the Fed to keep the federal funds rate at historical lows through at least the end of 2014, REIT investors are likely to profit well into the next year or two - and possibly even longer, depending on future interest rate adjustments.
Given its high yield and current low price, I feel that Chimera could be a real winner for investors - especially if they can pick up shares for under $3 each. This 'must own' stock can offer investors a steady income without the need to sell their position, as well as a great hedge against inflation, and cash flow - regardless of which direction the market is moving. For REIT investors who are comfortable taking on a bit more risk, I feel that Chimera is a great stock to own.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.