Chimera Investment Corporation (CIM) Has Red Flags You Can’t Ignore: Invesco Mortgage Capital Inc. (IVR), American Capital Agency Corp. (AGNC)

Peers

Invesco Mortgage Capital Inc. (NYSE:IVR) offers an attractive quarterly dividend of $0.65 per share. Because of the pressure on net interest margins, the company has had to reduce quarterly dividends from the previous $1 per share. However, Invesco Mortgage Capital Inc. (NYSE:IVR) has been able to sustain dividends over the previous six quarters, and in 2012 the company paid $2.60 in dividends, making for a dividend yield of around 12.7%. During the same period, its stock price has grown by nearly 25%. In response to the quantitative easing by the Fed, the company has moved its investment strategy from agency RMBS to non-agency RMBS and commercial mortgage-backed securities (CBMS). At the end of the fourth quarter, the agency RMBS portfolio declined by $604 million, while the non-agency RMBS and CBMS portfolios grew by $534 million and $297 million, respectively. The stock is trading at a price to book ratio of around 1 and is a good choice for income investors.

American Capital Agency Corp. (NASDAQ:AGNC) is an mReit that has an investment portfolio consisting exclusively of single-family residential mortgage pass-through securities, and collateralized mortgage obligations acquired with leverage. It has recently announced a quarterly dividend of $1.25 per share, which is the same as the past four quarters and, over the year, the company has paid a hefty annual dividend of $5 per share. Recently, the company announced comprehensive income of $126 million, or $0.36 per common share, for the fourth quarter and, at the end of the quarter, net book value per common share was $31.64.

Regardless of the quantitative easing measures, the company's investment strategy and asset selection remained the same, enabling it to sustain an economic return of over 30% in the last four consecutive quarters. The CPR is 1% lower compared to the past quarter's CPR of 10%, and investors should note that CPR influences the stability and sustainability of earnings, and is also a hallmark of effective risk management. Furthermore, at the end of the fourth quarter, interest spread rates increased to 1.63% compared to 1.42% in the preceding quarter when they were falling for much of the competition. I believe American Capital Agency Corp. (NASDAQ:AGNC) is a must-own for investors seeking solid income.

Summary

Chimera Investment Corporation (NYSE:CIM) is a highly avoidable investment at this point in time, despite its large dividend yield. I believe investors should consider selling any shares of the stock that they currently hold. Until we have had a chance to examine the financials, there is a good chance that the dividend is not only an income distribution but a return of capital as well. You can always take a new position in the stock after the financial statements have been published.

The article This mREIT Has Red Flags You Can't Ignore originally appeared on Fool.com and is written by Maxwell Fisher.

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