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Thursday, February 2, 2012
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.
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 (NYSE: CIM)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'll 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.
Like Chimera, Annaly pays an outstanding double-digit dividend yield. And with the government promising to keep interest rates low until 2014, Steve believes you could make 60%-plus gains here in the next two years.
Sinking real estate prices are the main risk to mortgage REITs like Chimera and Annaly... But according to Steve, the real estate bust is finally over. "Consumer confidence is rebounding," he says. "Things are getting less bad. This is the bottom."
DID YOU TAKE OUR "BIG CHEAP TECH" ADVICE AND BUY?
With today's chart, we check in with our "Big Cheap Tech" idea... and note that it's still working.
Back in September 2010, Steve pointed out how many of America's elite tech companies – like Apple, Microsoft, Intel, and Cisco – were trading for extremely low valuations. You just had to account for their giant cash hoards to realize it. Despite the reliable cash flows and dividends these companies boast, investors simply weren't interested in owning them.
As you can see from today's chart, folks are warming up to our idea. Below is a chart of the "QQQ" fund. It's one of the market's most popular ways to take a diversified position in tech stocks... and it has heavy weightings in the cash-rich giants we cited above.
Like most every asset, the QQQ fund suffered a sharp selloff during last summer's panic. It spent the next four months "collecting" itself and forming a price base. It has used this price base to spring to a fresh multi-year high. The trend in "Big Cheap Tech" is UP.
In The Daily Crux