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However, an outright collapse of the stock market isn't the real risk. Instead, it's that the housing market will start to get healthier, and more investors will be comfortable buying up RMBS, pushing their yields down. As profit spreads tighten, Two Harbors will simply make less, and the dividend may fall as low as $1 a share. Still, that equates to an almost 10% yield at current prices.
As of the most recently reported quarter, Two Harbors was one of
Appaloosa Management's holdings
Chesapeake Granite Wash Trust: 13.7% yield
CEO Aubrey McClendon is too clever by half. He's spent the past few years buying and selling oil-and-gas-related assets and has now put the company's stock at risk. Chesapeake's base of assets is formidable, but the company's near-term debt obligations are even more so.
One of McClendon's balance sheet tricks was to sell off the profit stream from some of its energy fields in the form of the
Chesapeake Granite Wash Trust
in late 2011 (the company owns three-fifths and the public owns the rest). The $19 IPO initially ran to $30 in March, 2012, but is now down below $20, creating an eye-popping dividend yield. Much of the blame goes to the sharp slump in natural gas prices, which threaten to impede cash flows -- and Chesapeake Granite Wash's dividend.
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Yet investors should know that the parent company, Chesapeake Energy, will have to forego the rights to a share in the cash flow if the cash flow dips. Still, cash flow has been so sharply reduced that Chesapeake had to cut the quarterly dividend to 66 cents a share, below the 74 cents a share that many investors had been expecting.
Right now, there is some debate about whether the dividend reduction was just a one-time measure, or the start of a trend. If you're a far-sighted investor, it doesn't matter. Payouts may fall even further, pushing this yield into the high single-digits, but when oil and gas prices rebound (as they invariably do), the payouts will rise again.
More to the point, that sub-$20 stock price won't last. An eventual move back to the $30 level seen a few months ago implies 50% upside, plus that eventually restored robust payout.