Updated May 19, 2021 by Bob Ciura

Dynex Capital (DX) is a mortgage real estate investment trust (mREIT) that offers an attractive return of 8%, making it a potentially attractive high-yielding stock.

Dynex Capital also pays out its dividends on a monthly basis, which is rare in a world where the vast majority of companies that pay a dividend pay it out on a quarterly basis.

There are currently only 56 companies with monthly dividend payments. You can view the full list of monthly dividend stocks (along with relevant financial metrics like dividend yields, payout ratios, etc.) by clicking the link below:

Dynex Capital’s high dividend yield and monthly dividend payments make it a fascinating stock for dividend investors, though dividend payments have declined in recent years.

As with many high-dividend stocks, however, dividend sustainability is an important consideration. This article analyzes Dynex Capital’s investment prospects.

Business overview

Dynex Capital is a mortgage real estate mutual fund. As a mortgage REIT, Dynex Capital invests in the US on a leveraged basis in mortgage-backed securities (MBS). It invests in agency and non-agency MBS consisting of residential MBS, commercial MBS (CMBS) and interest rate-linked CMBS securities.

The MBS agency has a principal payment guarantee through a US government agency or a US government sponsored entity such as Fannie Mae and Freddie Mac. Non-Agency MBS do not have such a payment guarantee. Dynex Capital, Inc. was founded in 1987 and is headquartered in Glen Allen, Virginia.

The company is structured to have internal management, which is generally positive as it can reduce conflicts of interest. If they increase total equity, there will be no other significant effects on operating expenses. Over time, Dynex’s management team has built a strong track record of generating attractive total returns for shareholders:

Source: Investor Presentation

Dynex’s portfolio is structured to be broadly diversified across stocks from private and commercial agencies. This diversified approach creates an attractive risk / return ratio from which the company has benefited for many years. Over time, the mix of CMBS and RMBS investments has reduced the negative impact of prepayments on portfolio returns. In addition, the agency CMBS acts as a cushion in the event of unexpected volatility in interest rates.

Finally, the high quality CMBS I / O are selected for shorter term and higher return, with the intended effect of limiting the volatility of the portfolio. A significant portion of Dynex Agency’s 30-year fixed income RMBS portfolio has prepayment protection through restrictions on refinancing incentives.

Management expects to opportunistically increase leverage in the high-quality asset portfolio while avoiding credit-sensitive assets that are leveraged with short-term financing. As a result, the company has a highly flexible portfolio that allows management to move quickly to other attractive opportunities as markets remain volatile.

The reported trust ffirst– –Quarterly results on April 28th, 2021. Core operating earnings per share were US $0.46th, above from $0.45 sequentially. Net interest income fell from $14.4 Million to $12.3 million quarter– –over– –quarter and customized Net interest income fell to $ 20.8 million from $20.9 million sequentially.

The confidence also reported 6.9x in leverage including TBA dollars as of March 31, 2021, compared to 6.3x as of December 31 2020. B.Value per common share stood at $20.70 from March 31st, 2021 above from $19.08 on December 31st, 2020.

Growth prospects

Given that interest rates are expected to stay in a narrower and lower range for longer than ever than ever in recent history, returns are likely to suffer significantly. This is because the world’s economies continue to be weighed down by large pools of negative interest-bearing debt, forcing central banks to remain accommodative in their monetary policies.

Apart from that, such a low interest rate environment offers an opportunity for high quality loans secured by real assets. While numerous short-term headwinds remain (as we’ll discuss next), Dynex is still benefiting from several long-term factors that could allow them to continue growing.

First, in a world with low returns, an aging population should encourage growing demand for the cash flow their business can generate, thereby increasing valuations and making it easier to raise capital for mortgage REITs. Second, the demand for private capital in the US real estate finance system should increase as the Federal Reserve seeks to reduce its investment in the RMBS agency and the GSE reform opens up new investment opportunities.

Third, the lack of affordable housing means that additional investment in the sector is required.

Source: Investor Presentation

Finally, Dynex brings some competitive advantages to the table that should enable it to generate strong returns for investors throughout economic cycles due to this long-term tailwind.

This includes the company’s experienced management team with expertise in managing securitized real estate across multiple business cycles. This also includes an emphasis on maintaining a diversified pool of highly liquid mortgage investments with minimal credit risk and attractive dividend yields.

Risk considerations

While the long-term outlook is more promising, some challenges remain in the near future. First, this includes a shrinking spread between 3-month LIBOR and short-term repo rates as repo rates remain elevated due to the extremely low Fed Funds rate.

Besides that, the trustNormalized diluted earnings per share were actually quite stable in the last recession, despite stocks still sold very strongly and lost about 40% of its market value. All in all thatThe small margin of safety is largely due here on the payout ratio is so tall, combined with high volatile Merits– –Per– –share.

Another risk is that prepayment speeds can increase due to seasonal factors. In addition, the fall in mortgage rates could increase refinancing activity and further detract from profits.

While some payoff refinances are already factored into the company’s prepayment expectations and the portfolio has been structured to hedge against some of it, there will likely still be a loss of profits. This explains the company’s most recent pattern of dividend cutbacks since 2019.

Dividend analysis

Recent results showed a dividend that appears to be backed by earnings, as the company paid a dividend of $ 0.39 per share for the quarter. At the same time, Dynex delivered Core operating earnings per share were US $0.46th.

Including the dividends paid so far in 2021 and the dividends expected for the rest of the year, Dynex will pay dividends of $ 1.56 this year. Based on the most recent closing price of $ 19.70, stocks are now yielding 7.9%. On the surface, Dynex looks like an attractive high-yield dividend stock.

It is important that the dividend appears covered. We anticipate Dynex to have operating earnings per share of $ 1.87 in 2021. This means that the expected payout ratio is 83%, so that the dividend can be maintained provided that operating earnings per share do not decline significantly.

Final thoughts

Dynex Capital’s high dividend yield and monthly dividend payments are what make high-yield dividend investors stand out. However, we remain extremely cautious on the stock.

The company is covering its dividend for now. However, the risk of the business model means Dynex suffers potentially heavy losses if the economy slips into recession and defaults increase. We also find stocks with a 2021 P / E of 10.5 are overvalued compared to our Fair Value P / E of 8.

This makes the stock quite risky. Despite the high dividend yield, investors looking for monthly income have better choices with more favorable growth prospects and safer dividends.

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