Things Remain On Track for the Market's Hottest Dividend Sector

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Annaly Capital (NYSE: NLY  ) and Chimera Investment (NYSE: CIM  ) reported earnings this week, and the news bodes well for investors in the mortgage REIT sector. Annaly returned solid results, as I discuss here, and Chimera also provided reasons for investors to be bullish.

For the second quarter, Chimera reported core earnings of $145.6 million, or $0.14 per share. Core earnings approximate distributable income, which is what investors in high-yield mortgage real estate investment trusts should focus on.

While Chimera's earnings show a sequential and year-over-year downturn, earnings can vary markedly from quarter to quarter in the normal course of business. But that also means the dividend fluctuates, and Chimera distributed $0.13 per share in the second quarter, compared to $0.17 and $0.14 in the year-over-year and previous quarters, respectively. That dividend still annualizes to more than 16%.

The company has maintained a relatively low level of leverage and focuses on earning a high interest rate spread, compared to peers.


Debt to Equity

Average Spread Q2

Chimera 189% 4.20%
Annaly 577% 2.45%
American Capital Agency (Nasdaq: AGNC  ) 739% 2.46%
ARMOUR Residential REIT (NYSE: ARR  ) 879% 2.36%
Cypress Sharpridge (NYSE: CYS  ) 745% 2.23%

Source: Capital IQ, a division of Standard & Poor's.

Chimera's spread is down 121 and 136 basis points sequentially and year over year, respectively. But ongoing business conditions look positive for Chimera and its sector peers. Chimera CEO Matthew Lambiase noted, "Attractive investment opportunities are developing in these market conditions, and we believe that the company is well-positioned to take advantage of them."

That sentiment seems to echo what Annaly CEO Michael Farrell stated in that company's conference call for the most recent quarter. Farrell said, "The long-term implication of these conditions is that the very favorable operating environment in which we find ourselves is likely to persist for a significant period of time."

Those favorable conditions are leading mortgage REITs to raise more capital and allowing new companies to IPO. Recent quarters have seen Chimera, Invesco Mortgage Capital (NYSE: IVR  ) , and Annaly raise fresh funds. Today also saw the debut of American Capital Mortgage, a spinoff of American Capital (Nasdaq: ACAS  ) .

Foolish bottom line
Chimera's quarter and the ongoing market malaise should give investors reason to consider mortgage REITs for their portfolio. With their hefty yields, mortgage REITs provide some income stability in tough market conditions. And that's why I like them.

Jim Royal, Ph.D., owns shares of Annaly and American Capital. The Motley Fool owns shares of Chimera and Annaly. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 04, 2011, at 3:47 PM, jcder wrote:

    My advice would be to purchase a mortagea REIT ETF like "REM", in lieu of the purchase of individual REIT stocks.

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10/25/2016 9:42 AM
CIM $15.64 Up +0.08 +0.51%
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