Investing in mortgages might not be as bad as many thought.  Chimera Investment Corporation (NYSE: CIM) has already raised more capital on more than one occasion since coming public in 2007 when the mortgage arena was in the process of going from weak to bottomless.  We were intrigued by its vulture investing intentions as it bought up distressed mortgages, particularly as it was tied to the very successful Annaly Capital Management, Inc. (NYSE: NLY).  Despite the notion that Chimera became a vulture too soon and well before any bottom could be found in sight, Chimera must be doing pretty well again.  Ditto on Annaly.  This mortgage REIT status requires each to pay out 90% of its income and Chimera just hiked its dividend to $0.12 for the Q3-2009 period.  Annaly also just hiked its dividend payout today to $0.69, which might actually be its highest payout ever.

Chimera is an externally managed by Fixed Income Discount Advisory Company, a wholly-owned subsidiary of Annaly Capital Management, Inc. (NYSE: NLY).  We do not have the current ownership information as the data is now 3 months and 6 months old, but Annaly was a large stakeholder.

Chimera invests in residential mortgage loans, residential mortgage-backed securities, real estate-related securities and various other asset classes that go well into Alt-A in ratings.  It generates income from the spread between yields on its investments and its cost of borrowing and hedging activities.  If it is paying out 90% of its income as a dividend and it raised the payout this much, its investing must be paying off now.

Chimera’s closed down 1% at $3.91 today and its 52-week trading range is $1.53 to $8.00. Annaly’s stock closed down 0.2% at $18.70 today, and its 52-week trading range is $9.94 to $18.88.

Be advised that it will be difficult to tell if Chimera will be hiking its payouts or cutting them from quarter to quarter as it is in the volatile sector of mortgage REITs, is only about two years old, and is in a sector were earnings can and have fluctuated wildly.  Here is Chimera’s dividend history:

• May 28, 2009         $0.08 Dividend
• April 2, 2009        $0.06 Dividend
• December 26, 2008    $0.04 Dividend
• September 16, 2008    $0.16 Dividend
• June 10, 2008        $0.16 Dividend
• March 27, 2008      $0.26 Dividend
• December 27, 2007      $0.025 Dividend

Annaly’s dividend has also been growing but has a history of being volatile.  Its past dividends going backwards and starting at June 25, 2009 are $0.60, $0.50, $0.50, $0.55, $0.55, $0.48, $0.34.

JON C. OGG
September 21, 2009

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