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Wednesday, February 23, 2011

Defensive Investment in a Volatile Market - CIM, TWO

Two days of straight 100 points drop on Dow probably scared away many weak hands and even shook confidence of long term investors.  Although most stocks for these two days are in the red, there is a group of stock that could still make investors smile - the high-yield dividend companies.  Investors of these companies do not need to be upset about a down day but on the contrary should be smiling because the lower the price for these stocks are, the higher the yield is. 


So for instance let's say a stock worth $5 per share pays 40 cents divided which makes an 8% yield.  If the stock drop to $4 per share, the yield now becomes 10%.  The price drop is probably not a good news if you are not putting anymore money in.  However if you are long term and continue to buy the same stock, the new lower price and higher yield works for you as beside the higher yield, you get to buy more shares for the same price.  


Two high-yield dividend companies worth looking at are Chimera Investment (CIM) and Two Harbors Investment (TWO).  Both of these companies invest in residential mortgage-backed securities and have decent dividend yield of 16% and 15% respectively.  Shares of CIM have gained 15% for the past 52 weeks but is still trading at a very low P/E ratio of 6.4 while Two Harbor Investment gained 22% during the same period and is also trading at a low P/E ratio of 6.98.  The chart shows both of these stocks are on the up side and even if the price stay the same for the next 52 weeks, you are still getting a 15% return for the year, a pretty decent investment.

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