Real Estate Investment Trusts

If you are looking for extra income from your investments, take a look at real estate investment trusts. Real estate investment trusts (REIT’s) are known for offering some of the biggest dividends around. REIT’s invest directly in residential or commercial real estate and receive special tax considerations from the government. In exchange for lower taxes, REIT’s are required by law to pay out 90% of their earnings in the form of a dividend to investors.

Let’s take a look at a relatively new REIT by the name of Chimera Investment Corp (CIM). Chimera is a spinoff of Annaly Capital Management. The company became its own entity in 2007. Chimera is a REIT that invests heavily in mortgage backed securities. Mortgage backed securities are claims on the future cash flows of mortgage loans.

If you have watched television over the last few years, you know the difficulties that the housing market is having. Mortgage backed securities are at the center of this mess.
Individuals are struggling to make their mortgage payments and homes are being foreclosed on nationwide. As a result of this home prices are dropping and loans are being defaulted on.

Despite the troubles in the housing market, Chimera has weathered the storm admirably. After two years of negative earnings, Chimera returned to profitability in 2009. The company has managed to grow earnings nearly 300% over the past 5 years. Revenue jumped over 500% last quarter. Earnings are expected to grow 8% over the next 5 years. These are excellent numbers for a company that operates in the real estate market which has been in the doldrums since 2006.

The good news is that things appear to be returning to normal in the securitization market. The Federal Reserve had been purchasing mortgage backed securities to help lower mortgage rates and prop up the housing market. The Fed has stopped purchasing these securities and now the market appears to be getting healthier on its own.

The future looks bright for the mortgage lending business. Although loan volume may be down in the future, loan quality will be much higher due to increased governmental regulations. Liar loans and no doc loans will soon be a thing of the past. This should help reduce the default rate on loan securities. MBS ratings should actually mean something in the future.

At just $3.71, Chimera trades at 1.07 times book value. Chimera is currently yielding an incredible 18.5%. The dividend payout appears sustainable. Chimera is expected to earn 75 cents for the full year and will pay out 68 cents in distributions. This is a 91% dividend payout rate to shareholders. At juts 5 times earnings, Chimera is a nice bargain for value investors.

2 replies
  1. ditchtheboss
    ditchtheboss says:

    Thank you for submitting this article to my weekly contribution. I hope to see another article in the next edition on Wednesday, 4 August 2010.

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