Chimera Investment: I Am Still Buying This 11% Yielding Mortgage Trust

Core Viewpoint - Mortgage real estate investment trusts (REITs) are becoming more attractive for passive income investors as the central bank is expected to lower short-term interest rates, which will reduce financing costs for this highly leveraged sector [1]. Company Overview: Chimera Investment Corporation - Chimera Investment Corporation (NYSE:CIM) is highlighted as a mortgage trust worth attention due to its stock trading at a significant discount to book value, following a reverse stock split and offering an 11% stock yield [2][3]. - The trust's dividend was covered by distributable earnings in Q1 2024, and there is anticipation for a re-rating potential once the central bank implements rate cuts [2][20]. Financial Metrics - Chimera Investment's portfolio is valued at $12 billion, consisting of $11.1 billion in residential mortgage loans and $1.1 billion in Non-Agency residential mortgage-backed securities [5]. - The net interest spread for Chimera Investment was 1.4% in Q1 2024, unchanged from the previous year, with expectations for an increase if short-term interest rates are lowered [8]. - The trust's GAAP book value decreased to $7.11 per share in Q1 2024 from $11.44 in Q1 2021, reflecting a 38% decline over three years [13]. Dividend Coverage and Payout - In Q1 2024, Chimera Investment earned $0.12 per share in distributable earnings, resulting in a dividend payout ratio of 92%, which increased by 7.1 percentage points from the previous quarter [10][12]. - The 39% dividend cut enacted in Q4 2023 has led to stronger payout metrics, with two consecutive quarters of a payout ratio below 100% [11]. Market Position and Valuation - Chimera Investment's discount to book value has exceeded 50%, making it one of the largest discounts in the market, attributed to a steepening yield curve and increased short-term interest rate volatility [14]. - The recent reverse stock split (1-for-3) aims to enhance liquidity and appeal to investors, although it does not alter the fundamental metrics of the company [19]. Investment Outlook - The mortgage-backed securities held by Chimera Investment are expected to increase in value in a falling-rate environment, positioning the trust for potential re-rating if the central bank cuts rates [6][20]. - With a covered 11% dividend yield and a significant discount to book value, Chimera Investment is considered a viable option for passive income investors with a higher risk tolerance [21].