Chimera Investment Corporation: This 13.7% Yielder Could Be a Contrarian Play
Beaten-Down Stock Offers a Huge Payout
Today, I want to talk about Chimera Investment Corporation (NYSE:CIM).
As a passive income hunter, I don’t really consider myself to be a contrarian investor. However, to get to the biggest yields, you often have to take a look at down-and-out stocks.
The reason is simple: at a given cash dividend payout, a company’s dividend yield moves inversely to its share price. So, if a company’s stock tanks and the cash payout remains the same, its dividend yield would shoot up.
And there is no shortage of out-of-favor stocks in today’s market. The COVID-19 pandemic led to a major sell-off earlier this year. And, while the broad market indices have largely recovered, a lot of stocks are still in the doldrums.
Chimera Investment Corporation, for instance, started 2020 trading at $20.59 per share. Today, its stock price is $8.76, marking a staggering drop of 57.5% year-to-date.
Now, when a contrarian investor deliberately goes against the prevailing sentiment and purchases a beaten-down stock, their reasoning is that investor pessimism has pushed the stock price below what it should be, and that shares would eventually rebound.
In the case of Chimera, though, the contrarian investor doesn’t have to wait to earn a return. The company has a quarterly cash dividend rate of $0.30 per share, which, at the current share price, translates into a jaw-dropping annual yield of 13.7%.
That is, whether CIM stock bounces back or not, if the company can maintain the current dividend rate, investors who purchase the stock would be getting a 13.7% cash return in a year.
However, I should point out that, like most double-digit yielders, Chimera Investment Corporation is not perfect. In particular, its current payout level is actually the result of a dividend cut.
Earlier in the year, the company had a quarterly dividend rate of $0.50 per share. (Source: “Dividend History,” Chimera Investment Corporation, last accessed September 9, 2020.)
No one likes dividend cuts. But because the drop in Chimera stock was so dramatic, the company is able to offer a higher yield even after reducing the cash payout.
So, the big question now is: can investors count on this 13.7% yield?
Well, Chimera Investment Corporation is a real estate investment trust (REIT) that invests in residential mortgage loans, non-agency and agency residential mortgage-backed securities (RMBS), and agency commercial mortgage-backed securities (CMBS). The company makes money from the difference between the income it earns on those investments and its financing and hedging costs.
According to the latest earnings report, Chimera Investment Corporation generated core earnings of $0.32 per share in the second quarter of 2020. While the amount represented a substantial decline from the $0.56 per share of core earnings generated in the year-ago period, it was more than enough to cover its quarterly dividend payment of $0.30 per share. (Source: “Chimera Investment Corporation Reports 2nd Quarter 2020 Earnings,” Chimera Investment Corporation, August 5, 2020.)
In the second-quarter earnings conference call, Chimera’s president and chief executive officer, Matthew Lambiase, said, “While this has been a very difficult period to navigate through, we believe Chimera is well-positioned for the future… We have been able to retain our legacy portfolio of assets which will allow us to continue to produce meaningful dividends for our investors in what may be an extended period of low interest rates.” (Source: “Chimera Investment Corporation (CIM) CEO Matthew Lambiase on Q2 2020 Results – Earnings Call Transcript,” Seeking Alpha, August 5, 2020.)
Bottom Line on Chimera Investment Corporation
At the end of the day, keep in mind that this is an extraordinary time and dividend cuts are not uncommon. According to a report from S&P Global earlier this year, around half of the mortgage REITs in the U.S. had reduced or suspended their dividend payments due to the impact from the COVID-19 pandemic. (Source: “About 50% of US mortgage REITs cut, suspend dividends over COVID-19 crisis,” S&P Global, April 29, 2020.)
However, the downturn in mortgage REITs’ share prices have created some extremely high yielders. If Chimera Investment Corporation can keep paying the current dividend rate, CIM stock could represent an opportunity for yield-seeking investors.