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How to Collect 18% Dividends by Being the Bank

By Dr. Steve Sjuggerud
Monday, October 24, 2011

I'd never done it before... But a few weeks ago, I MADE my first mortgage loan.
I'll safely earn a double-digit interest rate in this zero-percent world.
The mortgage loan I made will pay me 12% interest, plus a "point" (1%) up front. It's a first mortgage on a home, and it's well-secured by a 40% down payment.
I never intended to make a mortgage loan. I never intended to "be the bank." But these days, banks won't make this particular loan...
Banks are perfectly willing to make loans that conform to certain government guidelines. The typical "conforming" loan is to a middle-class couple buying a middle-class house for their primary residence, with a decent down payment and decent credit.
Banks want to make conforming loans because they know they can immediately turn around and "sell" that loan to the government.
But the loan I made is lower risk, I think, than many conforming loans.
You see, the homebuyer – a friend of a friend – is in the real estate business. He's not buying this as a "primary residence." He's speculating. He's buying the property dirt-cheap. And he believes he already has it sold for a much higher price.
Whether he has it sold or not, I'm not that worried. The collateral is there for the loan. So I'm secured. But because it doesn't conform to the government standard, banks don't want it. And I get to safely pocket 13% over the next year. I'll take it!
I don't expect you to do exactly what I'm doing. But today, you can make a similar investment in the stock market...
The company is called Chimera. It's a sister business to our favorite mortgage traders – the guys behind Annaly.
Right now, roughly 20% of Chimera's capital is invested exactly as Annaly invests: with leverage in government-guaranteed mortgages. But the rest is invested in non-conforming loans, like the one I wrote... non-conforming loans paying double-digit interest rates. (These are not sub-prime loans.)
Unlike a bank, which uses a large amount of leverage (borrowing money), Chimera's current business model is to hold mortgages mostly without leverage. Just like me, it's resisting the temptation to borrow money at a low interest rate to invest it in these mortgages at a higher rate.
Even without all that leverage, the business earns a mid-teens yield on its portfolio. And it distributes nearly all those profits to shareholders through dividends. Chimera yields nearly 18%.
It's also incredibly cheap. It sells for just 0.85 times book value. And with a business like Chimera, book value IS liquidation value. So we have an opportunity to buy $1 for just $0.85... and collect 18% dividends along the way.
With my own money, I'm personally doing what Chimera is doing. You can do the same through the stock market... with less hassle... and you'll get paid even more interest.
Good investing,

Further Reading:

Steve is personally invested in the real estate trend and has been following it for years. Learn more about what's happening in the sector here...
By buying yesterday, I didn't do anything you can't do. I just happened to get off my duff and do it!
Right now – today – U.S. real estate is the most affordable it's ever been. Ever.
Could mortgage rates in the U.S. fall below 2%? Don't be too hasty to say "no way."

Market Notes

Family Dollar Stores (FDO)... discount retail
Dollar General (DG)... discount retail
Nordstrom (JWN)... marked up retail
Domino's Pizza (DPZ)... Big Pizza
Intuitive Surgical (ISRG)... robotic surgery
Nalco (NLC)... water treatment

First Solar (FSLR)... solar stocks perform as advertised
Canadian Solar (CSIQ)... solar stock
Bank of Ireland (IRE)... Euro crisis
Nevsun Resources (NSU)... gold stock
Agnico-Eagle Mines (AEM)... gold stock
Cohen & Steers (CNS)... real estate asset manager
Shaw Group (SHAW)... infrastructure builder
Western Digital (WDC)... hard drive maker
Boston Scientific (BSX)... medical devices
Badger Meter (BMI)... water meters
MF Global (MF)... broker/dealer
Texas Industries (TXI)... construction materials

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