Time To Buy This 11.5%-Yielding Top-Shelf Mortgage REIT?

Summary

• The stock market drop is a good opportunity to buy mortgage REITs with robust dividend coverage stats.
• Given Chimera's continued excess dividend coverage in the fourth quarter, a dividend hike in 2018 is in the cards.
• Chimera Investment Corp.'s shares are cheap, selling for just 7.0x Q4-2017 run-rate core earnings.
• An investment in CIM comes with an entry yield of 11.5 percent.

High-yield income vehicles are on sale again. Thanks to the sudden return of volatility in the last two weeks, mortgage REITs offer attractive entry points. In particular, Chimera Investment Corp. (NYSE:CIM) is a promising buy on the drop. The mortgage REIT reported strong fourth quarter results, and continued its streak of significant dividend excess coverage. Shares are much more reasonably valued after the sell-off, and an investment in the mortgage REIT comes with an entry yield of 11.5 percent.

I owned Chimera Investment Corp. before, but ditched the mortgage REIT in early 2017 because it appeared that Chimera as well as the high-yield sector in general were widely overbought. Further, the rate of price appreciation was unsustainable in my view. I discussed my motivation to exit my investment in Chimera Investment Corp. in my article titled "Why I Have Ditched This High-Flying 10% Yielder".

Source: StockCharts

Market Correction Provides Entry Opportunity

That said, though, the recent correction in the stock market is a good opportunity to reevaluate Chimera Investment Corp. and buy the mortgage REIT for its excellent dividend.

Chimera Investment Corp. has above-average dividend coverage stats, which suggests that Chimera will be able to not only maintain its dividend but also potentially grow it in 2018. The mortgage REIT raised its quarterly cash dividend from $0.48/share to $0.50/share in the fourth quarter of 2016 and has since kept its dividend payout steady.

Chimera Investment Corp. has consistently overearned its dividend with core earnings, and the mortgage REIT has a rather low core earnings payout ratio.

As a matter of fact, Chimera's core earnings payout ratio has averaged 85 percent in the last ten quarters, leaving significant room for a dividend hike in 2018.

Source: Achilles Research

More Sensible Valuation, Attractive Risk-Reward

Chimera Investment Corp.'s shares have slumped ~17 percent from their last 52-week high @$20.90. The stock market slump has made Chimera Investment Corp.'s dividend stream a lot more affordable. Today, income investors seeking a high, covered dividend from a top-shelf mortgage REIT investment pay just ~7.0x Q4-2017 run-rate core earnings.

Expecting A Dividend Hike

Given Chimera Investment Corp.'s strong dividend coverage in the fourth quarter - $0.62/share in core earnings compared to $0.50/share in dividends - I'd think a dividend hike in 2018 is entirely within the realms of possibility. Management could decide to either increase the quarterly cash dividend to $0.51-$0.52/share, reflecting a 2-4 percent dividend hike, or pay a one-time special dividend to shareholders like it used to in the past. Either way, shareholders are likely going to benefit from higher dividend income going forward.

Your Takeaway

I think the sell-off in the stock market in the last two weeks puts Chimera Investment Corp. back on the map. While I wasn't a big fan of the mortgage REIT in 2017 when shares reached new 52-week highs and the rate of price appreciation was unsustainable, the drop is a good opportunity to add a high-quality mortgage REIT to a high-yield income portfolio. Chimera's shares are quite cheap, and they throw off a covered 11.5 percent dividend. Buy for income and capital appreciation.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.