CIM Stock Offering a High Dividend Yield of 10.2%
Imagine finding a dividend stock that pays a north of 10% and is still growing. Now, your initial thought might be that there is a lot of risk in such a stock, which is true. However, this is why it is important to research the business to ensure that its cash flow is able to support the dividend.
When breaking down a company, you need to look at its past, present, and potential future revenue. The past gives insight into how shareholders are treated, while the present will help determine if the dividend is safe and the investment makes sense. This way, your income doesn’t take a hit.
A safe dividend yield will help support the stock price and preserve the capital invested in the company. Just keep in mind that a dividend is paid out by a company because they choose to reward shareholders a piece of the profits. If one day the company decided not to pay out a dividend, the management team would be able to choose these actions.
The company that we will be looking at today is Chimera Investment Corporation (NYSE:CIM). CIM stock’s dividend yield is 10.2%, meaning $10.20 received annually for every $100.00 invested in the stock.
Let’s take a look at the company and its operations to see how shareholders can make money.
Business Overview
Chimera is a real estate investment trust (REIT) that invests in mortgage assets such as residential mortgage-backed securities (MBS), non-agency mortgage investments, commercial MBS, residential mortgage loans, and real estate-related products. The majority of the investments are made into packages of mortgages, which at times could hold hundreds of different borrowers. The portfolio of assets removes the risk of relying on one mortgage borrower to pay back the initial principal and, more importantly, the interest income.
With Chimera, there is a possibility of receiving the capital back when the mortgage agreement is over, but during the investment period, cash flow is the priority. Both investment-grade and non-investment-grade MBS are featured in the portfolio.
Investment-grade mortgages feature a high degree of cash flow and preserved capital based on the mortgage borrower’s history of paying back mortgages and related interest. Non-investment grade mortgages, meanwhile, are riskier but feature a higher income source. With these mortgages, more due diligence is done to ensure that the income source is safe.
Solid Dividend Income
CIM stock tends to pay out its quarterly dividend of $0.50 per share in January, April, July, and October. In 2015, the dividend was $0.096 per share, meaning it has grown 455% over the past two years.
One of the reasons why CIM is able to pay out a high, growing dividend is its REIT status, which carries some tax advantages. For instance, one of the requirements for being a REIT is that 90% of revenue must be paid out to investors, which ensures that there will always be a dividend.
Dividend growth can be partly attributed to the rise in revenue. Over the past five years, revenue has increased 43%, and as it’s risen, so too has the dividend. This trend could continue since there is very little volatility in interest rates and home ownership rates are steady. (Source: “Chimera Investment Corp.,” MarketWatch, last accessed June 19, 2017.)
There are a few things to take away from the company’s current status. First, the dividend is sustainable and growing. Second, shareholders are held in high regard and rewarded well and often. Lastly, there’s income to be found here and, as a REIT, isn’t going anywhere.
Valuation
CIM stock currently has a price-to-earnings (P/E) ratio of 5.9 times, or $5.90 paid for every $1.00 the company earns. This is a very appealing valuation, especially when compared to Chimera’s competition. The valuation for the entire group of mortgaged-based REITs is 12.9 times—more than double that of Chimera. This is a great comparison because the companies compete for the same market share, see the same trends towards earnings, and tend to have margins in the same ballpark. CIM stock also has a dividend yield nearly triple that of its peers, another point in its favor.
Final Thought About CIM Stock
CIM stock is a great example of a high-dividend-yielding stock with a safety feature attached to it. Based on the company’s history, higher income could be received in relation to the initial invested capital, provided dividend growth continues.
This is why CIM stock is one of my favorite stocks in the mortgage investment segment. This is why researching a company is important, since the name “Chimera Investment Corporation” is not that well known.