Where can you earn decent interest on your money in our zero-percent world?
Where can you get a decent “yield”?
Chimera Investment Corporation (CIM) has a unique business model that’s currently paying a 14.5% dividend. Let me tell you about it…
Chimera fills a hole in the investment world – one that banks and the government are afraid of.[ad#Google Adsense 336×280-IA]You see, since the real estate market fell off a cliff, banks have been desperately trying to get rid of many of their real estate loans… at ANY price. And that’s where Chimera comes in…
Chimera is willing to buy loans that banks want to get rid of – as long as it can buy those loans at a huge discount.
The company collects double-digit interest rates on those loans, and then pays that interest out to shareholders at an outstanding 14.5%.
Chimera has over three-quarters of its portfolio in these high-yielding bank mortgages. The other quarter is sitting and waiting for opportunities… But instead of sitting in cash, it’s earning double-digit interest rates there, too… (Chimera has invested this money like its “parent” company Annaly. It will sell this portion of the portfolio as more opportunities arise in discounted real estate loans.)
The biggest risk for this business is another downturn in real estate…
If the real estate market turns down, many of Chimera’s mortgages will go bad. And the value of its portfolio will go down.
The mortgages Chimera holds are mostly higher-risk mortgages, bought at a cheap price. It bought these mortgages knowing a good percentage of them would go “bad.” But since it paid such a low price, it can still make high returns… even as some go bad.
However, I’m not too worried about this downside risk… I don’t expect another downturn in real estate. As I’ve explained many times, I think U.S. real estate is as affordable as it’s ever been. And I don’t expect it to get much cheaper from here.
Shares of Chimera sell for around $3 as I write. And the dividend is about $0.44 (a 14%-plus yield). If you buy now, you could earn 29% in dividends over the next two years.
We have capital gains potential here as well… Investors are so scared of housing and banks right now, Chimera is trading at a discount to its book value. I expect the stock will trade at a premium to its book value at some time in the next two years – giving us capital gains in addition to the huge dividends.
The chance for a 50% total return over the next two years – in a business holding mortgages with limited leverage – seems crazy. But because it’s such a volatile time in the financial markets, this opportunity is completely legitimate.
As long as the real estate market doesn’t turn down again, we could see a 50% total return over two years in Chimera.
Source: Daily Wealth