The Safety Net: 13% Yield? No Thanks

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Dividend Investing

Last week, several readers asked me to take a look at the dividend safety of Chimera Investment Corp. (NYSE: CIM) a mortgage REIT with a nearly 13% dividend yield.

I’d say it’s about as safe as a 12-year-old novice skateboarder trying some aerial tricks without a helmet or knee pads. In other words, it’s not safe at all.

And it has nothing to do with the meltdown of mREITs lately.

Quick recap: mREITs have plunged as the Fed has hinted at a tapering of quantitative easing. This is because the Fed will likely slow down its purchases of mortgages, and as rates go higher, high-yield instruments aren’t quite as valuable. Additionally, some mREITS whose portfolios are not hedged could see a decrease in the value of their portfolios.

But Chimera’s problems started way before the mREIT blowup.

First of all, the company has had accounting issues in the past. It has restated several quarters’ worth of results. And it is several quarters behind on its quarterly filings. Not good.

In fact, the most recent quarterly results filed with the SEC are from the March quarter 2012.

So how can we even determine if the dividend is safe if the company is over a year behind on its filings?

But let’s take a look at the March 2012 filing just for kicks and giggles.

In the quarter, the company paid out $112 million in dividends, against $80 million in net income and $94 million in cash flow from operations. So in other words, the company paid out more in dividends than it earned or generated in cash.

That’s not sustainable. I’d love to see if that changed over the course of the next four quarters, but there’s that little matter of no filings on record, so we just don’t know.

The company did say that for the fiscal third and fourth quarters of 2013 it will continue to pay the $0.09 per quarter dividend and review the policy after.

The company’s track record of dividend payments is about as good as its record of filing quarterly results on time.

From December 2010 through June 2012, the company cut its dividend every quarter but two. It has been stable since it was lowered to $0.09 per share last June.

So we have a company that hasn’t filed its results in over a year – and when it did, the dividend wasn’t sustainable – and has a strong track record of dividend cuts. There’s not a whole lot more that needs to be said.

I wish I had a grade lower than F, but that’s as low as I go.

Dividend Safety Rating: F

If you’d like me to write about the dividend safety of one of your stocks, leave the ticker in the comments section below.