Among the many lessons I learned in the aftermath of the 2008 financial crisis, one of the most important was to do my own research. You simply cannot get ahead by chasing whatever tickers are hot on CNBC and Twitter, or by taking the headlines in financial media for granted.
But I must admit, it’s not always comfortable to think like a contrarian and focus on long-term income over a short-term adrenaline rush. It sometimes means sitting on stocks that may seem to “underperform” the high-octane tech stocks everyone’s gushing about. And it sometimes means thinking differently about performance by looking at what’s important to you vs. what’s important to your peers.
Let me show you what I mean in the strange story of a cheap and relatively unknown dividend stock — Chimera Investment Corporation (CIM), which currently yields an amazing 14.9%.
Chimera is a specialty finance company that invests in residential and commercial mortgage-backed securities. Though it technically doesn’t own any physical property, it still operates as a Real Estate Investment Trust, or REIT.
Fans of Greek mythology will know that the Chimera is a mean monster with a lion’s head, a goat’s body, and a serpent’s tail – which also breathes fire, just for good measure.
And fans of literature will know that the adjective “chimerical” is often used in older works to describe something amazing that is in fact too complicated or too fantastic to exist in reality.
Investors familiar with the long-term performance of this company may believe any talk of outperformance falls squarely in that latter category – namely, too good to be true. However, the numbers don’t lie. Chimera is a great example of an investment that can be both a money-making stock and a money-losing dog at the same time.
Which side of that equation you’re on depends, of course, on your strategy.
Chimera’s Outperformance is No Myth
Chimera stock was absolutely gutted by the financial crisis, as you could understand. Shares plummeted from a peak of almost $95 per share in early 2008 to just over $10 a few months later.
CIM shares did rebound, of course. But the true success story of CIM is one that you can only see if you think like a contrarian. You have to prioritize total returns, and you must continually put your dividends to good use if you want to unlock the potential of this stock.
Bear with me as we briefly go through the math using some round numbers to simplify things:
Here’s a chart of Chimera against the S&P 500 for exactly 10 years from Jan. 1, 2010, to Jan. 1, 2020. It’s easy to see CIM stock doesn’t really go anywhere while the large-cap index leaves it in the dust. If you invested $10,000 in each of these you’d have a tidy sum of $28,400 if you invested the typical index funds out there like the SPDR S&P 500 Trust (SPY). On the other hand, you’d pocket a mere $10,600 in your Chimera position.
The difference: Almost $18,200… a pretty big gap considering the initial amount invested.
But here at Contrarian Outlook, we know share price is only part of the story. And we never look at the surface numbers and write a stock off without doing the research ourselves.
For instance, throw in the generous quarterly distributions from CIM and you get a much different story. Dividends paid to shareholders across that period total $24.26. And considering shares only cost about $19.40 to start the year, that means dividends alone returned an impressive 124% or so in additional profits.
That gets us to more like $22,250 after accounting for “total returns” on the Chimera position after 10 years. That’s the power of dividends for you!
Of course, it’s still short of the SPY’s returns. Furthermore, in the interest of fairness we must acknowledge the S&P 500 pays dividends as well and add those in, too, to a final tally of $31,800 for this index fund. The gap has been slashed in half to $9,300… but CIM isn’t even close.
There’s one last trick we can deploy, however: a DRIP strategy – or Dividend Re-Investment Program. Instead of just sitting on those dividends, you re-deploy the capital in the stock market to buy even more shares.
Here’s where Chimera really pulls away, because this provides an exponential boost to the generous dividends to generate just over $41,500 with a DRIP approach compared to about $34,500 for the S&P 500. That’s not only a huge profit over your initial investment, but $7,000 in more cash than you’d give from investing the SPY index fund with the same strategy.
Sources: DividendChannel.com, ChimeraREIT.com
I know that’s a ton of numbers. These charts and accompanying table hopefully help out.
But the bottom line is this: By some measures, investing your cash in CIM was an epic fail over this 10-year period. However, with patience and the right strategy this stock can deliver significant outperformance.
And in this case, net returns of a stunning 316% over 10 years!
The Right Strategy, Plus the Right Stocks, Unlocks Legendary Returns
There are some investors whose eyes glaze over with any talk of numbers, payout ratios or total returns.
For them, the goal is simply to trade a $50 stock that turns into a $100 stock in short order.
The problem is that it is always easier said than done in a bull market. And in a more challenging environment on Wall Street, it’s downright impossible!
But if you have the patience and the head for numbers, it can really pay to start thinking like a contrarian, instead of just churning positions in pursuit of mythical gains. Stocks like Chimera can deliver long-term outperformance if you know how to fit them into your portfolio.
And believe it or not, there are other stocks that have an even brighter outlook right now – and in some rare cases, yields even better than the jaw-dropping 14.9% that Chimera offers.
Investors in “popular” stocks will never touch a yield like that.
But at Contrarian Outlook, we uncover hidden gems with double-digit yield every week!
These are the kinds of stocks that make up our “Perfect Income Portfolio”, a list of stocks that deliver at least 4X the dividends of the typical S&P 500 stock. All currently trade at attractive price levels with big-time yields.
This portfolio is designed to protect your hard-earned nest egg as well as provide a path to profits. The strategy includes:
- Consistent, predictable and reliable paydays
- A focus on undervalued, overlooked investments that are not the same old “crowded trades.”
- A hands off, long-term strategy that doesn’t keep you tied to your smartphone and stressed out about m market moves.
Our strategy is incredibly selective in its recommendations. It’s designed to reward investors who think differently by looking past the desire to outperform the market over the next week and instead focus on outperforming the market over the next decade.
The “Perfect Income Portfolio” isn’t for everyone, of course. Some people simply don’t have the patience to put their faith in math, or research, or proven track records of long-term performance. They simply want the next hot stock tip ASAP.
Our goal is simple: consistent 10%+ returns per year … without any high-risk, speculative investments.
That may sound too good to be true. But as the math on Chimera shows, sometimes amazing investments are right in front of you if you simply think differently about how they fit into your strategy.
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