Mortgage REITs are popular with many investors right now for the high dividend yields they currently provide. Sporting a dividend yield of 15%, Chimera (NYSE: CIM) is certainly no exception. I even purchased a few shares of the company in a real-money portfolio I co-manage for The Motley Fool.

Mortgage REITs issue shares to investors to raise capital, which they use to buy mortgage-backed securities. They also use short-term financing to boost their returns. They repay lenders out of the mortgage payments they collect, and most of the rest is returned to shareholders in dividends.

Here’s a simple visualization:

Reitmodel

Let’s take a quick look at four things investors in Chimera need to know. After that, we’ll see how Chimera stacks up next to its competitors.

1. Interest rate spread
A REIT’s interest rate spread is the difference between a REIT’s financing costs and its interest income. It’s a decent measure of investing profitability -- and portfolio risk.

2. Debt-to-equity ratio
Since interest rate spreads tend to be pretty narrow, REITs like to leverage those returns to generate bigger returns. Companies with safer portfolios can afford to take on more leverage risk than those with riskier investments.

3. Share growth
Since REITs have to pay out the vast majority of their earnings in dividends, the only way to grow their business is to take on more leverage or issue new shares. If a company issues a lot of shares, we want to make sure it does so at attractive prices so investors aren’t diluted.

4. Dividend yield
The main reason to buy mortgage REITs is for their dividend. The forward yield tells us what dividends we’ll get paid over the next year if earnings hold constant.

Let’s see how Chimera stacks up next to its peers in these four crucial areas:

Company

Interest Rate Spread (2010)

Debt-to-Equity Ratio

2-Year Annual Share Count Growth

Dividend Yield

Chimera

4.9%

176%

47%

15.1%

Annaly Capital (NYSE: NLY)

2.1%

632%

22%

14.2%

American Capital Agency (Nasdaq: AGNC)

2.3%

662%

193%

18.7%

MFA Financial (NYSE: MFA)

3.0%

293%

26%

12.0%

Data from Capital IQ, a division of Standard & Poor’s.

Chimera has issued quite a few shares recently to help finance its portfolio without taking on too much extra leverage. Over the past two years, Chimera’s price-to-book multiple has ranged from 0.99 times to 1.39 times, suggesting it probably got decent prices for those sales.

Compared to the rest of the mortgage REIT industry, Chimera tends to buy a larger portion of riskier mortgages not backed by Fannie Mae and Freddie Mac. (At last count, about half of the company’s portfolio wasn’t backed by the two agencies.) By taking on greater risk of non-payment, it’s able to earn a higher yield on its portfolio and generate a higher interest rate spread. Chimera maintains a lower debt-to-equity ratio than its peers to compensate for that increased portfolio risk, but for the time being it’s still able to pay out a juicy dividend.

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