Buy This 11.5%-Yielding Mortgage REIT On The Drop

About: Chimera Investment Corporation (CIM)
by: Achilles Research

I added Chimera Investment Corp. to my high-yield income portfolio last week.

Chimera Investment Corp. easily covers its dividend payout, and has room to hike its dividend payout.

Shares are reasonably valued on the drop, and now sell for a discount to accounting book value.

An investment in CIM yields 11.5 percent.

I added Chimera Investment Corp. (CIM) to my high-yield income portfolio last week. Chimera Investment Corp. has excellent dividend coverage for an eleven percent yielding mortgage real estate investment trust, and has room to lift its dividend payout. Shares are priced at a discount to accounting book value, and an investment in Chimera Investment Corp. yields 11.5 percent.

I think the drop in the stock market in October opens up a buying opportunity in Chimera Investment Corp. for income investors. Like most stocks, Chimera Investment Corp.'s shares have sold off in the last couple of weeks on the back of profit-taking. I used the market dislocation to buy CIM last week, and am comfortable holding the mortgage REIT for recurring income.

Source: StockCharts

Chimera Investment Corp. - Portfolio Overview

Chimera Investment Corp. is an internally-managed residential mortgage REIT that predominantly makes investments in residential mortgage loans and investment-grade and non-investment-grade mortgage-backed securities, or MBS. At the end of the June quarter, Chimera Investment Corp.'s investment portfolio was valued at $22.8 billion. Loans now account for more than half of the mortgage REIT's total investments.

Source: Chimera Investment Corp. Q2 2018 Supplement

Chimera Investment Corp. is a moderately levered mortgage REIT. Moderate to high leverage ratios are normal for mortgage REITs since they lever up their balance sheet with low-cost debt. Chimera Investment Corp.'s leverage ratio at the end of the June quarter was 5.1:1.

Source: Chimera Investment Corp.

Mortgage REITs earn money when the yield of their mortgage securities exceeds their funding costs. Here's an overview of Chimera Investment Corp.'s gross asset yield, funding costs and net interest spread.

Source: Chimera Investment Corp.

2 Reasons To Buy Chimera Investment Corp.

There are two specific reasons why I bought Chimera Investment Corp. on the drop. For one thing, the mortgage REIT has excellent dividend coverage stats for an eleven percent yielder.

Chimera Investment Corp. outearned its dividend in each of the last twelve quarters, which is exceptional for a high-yield, high-risk mortgage REIT (quarterly average of $0.584/share in core earnings compare against $0.492/share in dividends).

Here is Chimera Investment Corp.'s dividend coverage for each quarter in the last three years.

Source: Achilles Research

Chimera Investment Corp.'s core earnings payout ratio averaged only 85 percent in the last twelve quarters. For comparison, Annaly Capital Management, Inc. (NLY), a comparable mortgage REIT, pays out nearly 100 percent of its core earnings as dividends.

The second reason: Chimera Investment Corp. is quite attractively valued again on the drop. Shares currently sell for just 89 cents on the dollar, which allows investors to capture a higher margin of safety.

Chart CIM Price to Book Value data by YCharts

And here's how CIM compares against other mortgage REITs in the sector in terms of price-to-book-ratio.

Chart CIM Price to Book Value data by YCharts

Your Takeaway

The sell-off in the stock market is a good opportunity to scoop well-managed mortgage real estate investment trusts that produce recurring dividend income. Income investors can gobble up CIM for a ~10 percent discount to accounting book value, which improves their margin of safety. Further, Chimera Investment Corp. has rather good dividend coverage stats for an 11 percent yielding mortgage REIT. I think Chimera Investment Corp.'s dividend is sustainable, and the company can already afford to hike its base dividend, or pay shareholders a special dividend. Buy for income and capital appreciation.

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Disclosure: I am/we are long NLY, CIM. 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.