Dynex Capital: Short-Term Headwinds Threaten The 13% Dividend Yield

Dynex Capital (DX), (CHP-UN.TO) is a mortgage Real Estate Investment Trust (mREIT) that offers a lucrative 12.8% yield, making it a potentially attractive ‘high yield’ stock. You can see the full list of ~400 stocks with 5%+ dividend yields here.

Dynex Capital also pays its dividends on a monthly basis, which is rare in a world where the vast majority of companies that pay a dividend, pay them quarterly. There are currently only 41 companies with monthly dividend payments.

Dynex Capital’s high dividend yield and monthly dividend payments make it an intriguing stock for dividend investors, even though its dividend payment has been declining in recent years.

However, as with many high-dividend stocks with yields above 10%, the sustainability of the dividend is in question. This article will analyze the investment prospects of Dynex Capital.

Business Overview

As an mREIT, Dynex Capital invests in mortgage-backed securities (MBS) on a leveraged basis in the United States. It invests in agency and non-agency MBS consisting of residential MBS, commercial MBS (CMBS), and CMBS interest-only securities.

Agency MBS have a guaranty of principal payment by an agency of the U.S. government or a U.S. government-sponsored entity, such as Fannie Mae and Freddie Mac. Non-Agency MBS have no such guaranty of payment.

Dynex Capital, Inc. was founded in 1987 and is headquartered in Glen Allen, Virginia.

The company is structured to have internal management, which is good because it can reduce conflicts of interest. Additionally, when they increase total equity, there is no material impact on operating expenses. Over time, Dynex’s management team has built a strong track record of generating attractive total returns for shareholders:

(Click on image to enlarge)

DX Returns

Source: Investor presentation, page 19

Dynex’s portfolio is structured to be widely diversified across residential and commercial agency securities. This diversified approach creates an attractive risk to reward balance that has benefited the company for many years.

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