Dividend stocks have been all the rage over the past few years. Given abysmal bond yields coupled with the perceived safety of dividend stocks relative to growth stocks, some have even gone so far as to predict a dividend bubble.
As my colleague Morgan Housel noted earlier this year: "starved of yield with interest rates near 0%, investors are tripping over themselves to get dividends these days." It's for this reason that S&P 500 stocks with the highest dividend payout paradoxically began last year with the highest P/E ratios.
But for the smartest investors, it's not the current yield that matters, but rather the future yield. Take Bank of America which currently pays out only $0.01 per share a quarter in dividends. Assuming the nation's second largest bank by assets ultimately earns between $30 and $40 billion a year, which I believe it will, that payout could easily reach $0.25 over the next five to 10 years, equating to a yield on original investment of more than 8%.
The question then is not what a stock is currently yielding, but rather whether the dividend payout will increase with time. With this in mind, I've taken a look at some of the most popular dividend stocks in the financial industry to see whether or not they are likely to increase their dividend payouts in 2013. Up today is Chimera Investment Corp. (CIM -0.24%), a hybrid mortgage REIT operating under the corporate umbrella of Annaly Capital Management (NLY 0.59%).
Will Chimera raise its dividend this year?
While I'd like to be able to tell you that Chimera will raise its dividend payout this year, the chances of it doing so are slim. In the first case, as I've discussed before, Chimera's board announced at the end of November that it will maintain a regular dividend payout of $0.09 per share for the first and second quarters of 2013.
This is an unusual move. Typically, REITs like Chimera set their dividends according to taxable income -- the higher the latter, the higher the former, and vice versa. As a result, it's unusual for a mortgage REIT to preannounce its future dividend payouts so far ahead of time -- that is, before it can estimate taxable income. Chimera has acknowledged, moreover, that at least a portion of its dividend will represent a return of capital -- leading me to ask if Chimera has begun to liquidate. Of the $0.29 per share paid out through the third quarter of 2012, for instance, a full $0.06 is expected to be characterized as such for federal tax purposes.
In addition, it seems unlikely that Chimera will raise its dividend in the latter half of the year given the headwinds in the mortgage REIT industry. In the third quarter of 2012, the Federal Reserve initiated a third round of quantitative easing, under which it's purchasing $40 billion per month in mortgage-backed securities until the unemployment situation improves "substantially." Because these are the same securities purchased by mortgage REITs, the move will necessarily make the industry less profitable by driving up the price of their proverbial raw materials, thereby decreasing their yield on earning assets. To see more specifically how QE3 affected mortgage REITs, click here.
Contributing to this pressure is the fact that the mortgage REIT industry is getting crowded, with multiple new funds setting up shop in the last five years alone. Of the largest, American Capital Agency (AGNC -1.28%) and ARMOUR Residential (ARR -2.78%) joined the party in 2008, while CYS Investments (NYSE: CYS) and Two Harbors (TWO -0.88%) commenced operations in 2006 and 2007, respectively.
Taken together, in turn, it seems safe to say that, if anything, Chimera will be lucky to maintain its current payout, much less increase it, without dipping too far into its capital base. In my opinion, in fact, the best scenario for Chimera shareholders would be a buyout of the fund by Annaly, as the latter continues to diversify away from agency mortgage-backed securities.
