Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a company to understand the quality of its dividend and see how it's changed over the past five years.

The company we're looking at today is Chimera Investment (NYSE: CIM), which yields 19.5%.

Chimera, along with competitors Annaly Capital Management (NYSE: NLY) and ARMOUR Residential (NYSE: ARR), are mortgage REITs that take on short-term debt to fund large holdings of mortgage-backed securities. Chimera, however, invests in riskier mortgage-backed securities than its competitors and, as such, uses less leverage. The financial crisis of 2009 was good for the industry in that a lot of money left the sector, providing opportunities for the strongest players to continue to operate. Over the past few years, the industry has been raking in money, as short-term rates are very low and long-term rates have been high. Recently, however, shares have taken a hit as the Federal Reserve has begun taking steps to reduce long-term interest rates. Chimera was spun off by Annaly in 2007.

Chimera Investment Corporation Total Return Price Chart

Chimera Investment Corporation Total Return Price Chart by YCharts

To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years and, if so, how much it has grown.

Chimera Investment Corporation Dividend Chart

Chimera Investment Corporation Dividend Chart by YCharts

Chimera's dividend has been volatile but lately appears to have stabilized around $0.13.

For a mortgage REIT, the most important measure to follow is a company's interest rate spread. This is the difference between the rate the company borrows money at and the rate it lends money out at.

Source: S&P Capital IQ.

Chimera's interest-rate spread, although declining, is still very high and will probably remain so until interest rates begin rising again. As the Federal Reserve has stated it won't raise rates until 2013 at the earliest, you have some time before this will happen.


Source: S&P Capital IQ.

There are some alternatives out there in the industry. American Capital Agency (Nasdaq: AGNC) looks interesting with a high trailing yield of 19.4%, but its interest-rate spread of 2.1% means it is using much more leverage than Chimera to reach that yield. Invesco Mortgage Capital's (NYSE: IVR) trailing yield of 17.5% has fallen lately as its interest-rate spread has been dropping steadily. Last quarter it was 2.75% and a year ago it was 4.11%. CYS Investments (NYSE: CYS) rounds out the group with a 15.6% trailing yield, though its interest-rate spread is the lowest.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.