Home Commercial trading Dynex Capital: this mREIT pays a sustainable dividend yield of 9.54% (NYSE:DX)

Dynex Capital: this mREIT pays a sustainable dividend yield of 9.54% (NYSE:DX)



Investment thesis

Dynex Capital, Inc. (NYSE: DX) primarily invests and manages agency and non-agency commercial and residential mortgage-backed securities (MBS) that pay sustainable dividend yields to its investor. I believe at the current valuation this is a perfect opportunity to earn stable income and fixed returns.

About Dynex Capital

Dynex Capital is a mortgage real estate an investment trust (mREIT) that primarily invests in and manages agency and non-agency commercial and residential mortgage-backed securities. The MBS agency is backed by a principal payment guarantee from the US Government Sponsored Entity (GSE). MBS non-agency provides no such guarantee with respect to any payment. Under US tax laws, the company qualifies as a REIT because it distributes 90% of taxable income to its unitholder. It allocates more than 90% of the portfolio to the RMBS Agency. On March 31, 2022, 90.9% of capital is allocated to agency RMBS, 3.8% of the capital is allocated to agency CMBS IO, 3.5% is allocated to agency CMBS and 1.8% is allocated to non-agency CMBS IO. An allocation of more than 90% to agency RMBS is a great advantage for the company because it secures the investment by offering a guarantee on the payment of the principal.

Dynex Portfolio Structure

Portfolio Structure (Dynex Investor Presentation)

Compared to its peers, the company’s competitive advantage is that it can quickly sell the portfolio, shift funds between RMBS and CMBS based on market developments, and maintain strong performance in the event of rising interest rates. interest rate and volatility of interest rate spreads. I believe that in the current market environment, this advantage allows the company to be well positioned in the industry, as the government’s fiscal and monetary policy will be an important factor in driving revenue.

Chart of Book Value vs. 30 Year MBS OAS

Book Value vs. 30 Year MBS OAS (Dynex Investor Presentation)

It is currently paying a solid dividend yield of 9.54% based on its current share price. Relative to the current valuation, I think this dividend yield is solid and can be a perfect opportunity to earn stable, secure and fixed long-term returns for retirees and risk-averse investors. Now let’s discuss the sustainability of the dividend payment in the next section.

Solid dividend yield

Dynex Dividend Payout History

Dividend payment history (dynexcapital.com)

DX is currently paying the monthly installment dividend of $0.13 per share, representing an annual payment of $1.56 per share. With the current share price of $16.35, the annual dividend yield is 9.54%, which is very stable, safe and can be a source of fixed income in the current market scenario. Before the covid-19 epidemic, it paid an annual dividend of $1.66, or the return of 10.15% at the stock price level. I think the dividend payment could increase once the uncertainty in the global economy stabilizes. Suppose the dividend payment remains the same for the coming period; Still, the stable dividend yield of 9.54% is very attractive to retirees and risk-averse investors. Now let’s talk about the sustainability of the dividend payment in the years to come.

Balance sheet table

Dynex balance sheet (2Q22 result)

A strong cash position on the balance sheet is essential for sustainable dividend payments. DX currently has $325.7 million in cash or 45% of the current market capitalization of its balance sheet, which constitutes a significant cash position to support the payment of the dividend in the long term. The risk-reward scenario favors the company as demand for residential and commercial mortgages is high relative to historical levels. Currently, the mortgage rate has fallen back below Mortgages at 5% and 30 years are stagnating at nearly 2.77%, which is positive for mortgage demand. However, uncertainty remains regarding interest rates across the economy. After considering all these factors, I think the dividend payout is sustainable in a conservative scenario because even in the past the company has managed to earn a stable income. In the best scenario of stable interest rates, we can expect higher dividend payments.

What is the main risk that DX faces

Fluctuating interest rates

The company may see a decline in profitability during rising rates, particularly hikes in the U.S. federal funds target rate, as borrowing costs may rise faster than coupons on its reset investments or as investments mature . Bond yields should rise immediately once the Federal Reserve declares a higher target range for the fed funds rate or if markets believe it is likely to do so, which will have a negative effect on interest rates. net earnings, dividends, and book value per common share. The market value of securities may be adversely affected by changes in interest rates, which could reduce comprehensive income, book value per common share and cash flow. Since a large portion of its investment portfolio is made up of fixed rate instruments, rising interest rates will reduce the fair value of MBS as the market will demand a higher yield for this type of security. Margin calls from MBS lenders frequently follow declines in fair value, affecting the company’s liquidity.

Prepayments could increase due to lower interest rates, higher amortization costs of premiums paid to purchase investments and lower interest income. Additionally, when market participants consider the possibility of faster prepayment rates in the future, falling interest rates may also lead to a decline in the market value of RMBS. Unexpected and uncertain global political and economic events, such as the COVID-19 pandemic, the Russian-Ukrainian war, international and domestic trade issues or sanctions, could be difficult to predict in terms of impact on interest rates. interest.

Technical analysis and fundamental valuation

Dynex technical sheet

Technical chart (Investing.com)

DX has positive technical indicators suggesting a buying opportunity from current price levels. The stock is trading above its 50- and 100-day weighted moving average (WMA). This reflects a strong upward trend in the stock price. The 50-day WMA has recently crossed the 100-day WMA, which could translate to further momentum in the stock price. DX has a strong support zone at $16 price levels. I think there is limited downside risk from current levels and the stock price can see a solid uptrend. There is no significant divergence on the RSI indicator, but the stock is consolidating in the 50-60 RSI range. This range is generally considered a buy zone. The stock may test the 70 RSI band range soon, which could lead to a rise in the stock price.

DX currently trades at a stock price-to-book ratio of 0.98x versus the market median of 1.22x. DX is trading at a discount to book value at current price levels. I believe in the next quarters; the stock may trade near the sector midpoint price/book value. Now let’s look at the stock’s P/E multiple. The stock is trading at a P/E multiple of 9.05x against the sector median of 10.26x. The stock is undervalued on the P/E parameter, and I believe the stock may trade at a significantly higher P/E multiple of 12x in the near future. With the P/E multiple of 12x and FY2022 EPS estimates of $1.57, we get a target price of $18.84. That’s up 15% from the current stock price of $16.35.


DX has a strong dividend yield of 9.54% and the company has a history of consistent dividend payments. DX is trading at a discount to its book value and is also undervalued on the P/E parameter. I think the stock is a great investment opportunity for investors looking for stable dividend income with limited risk exposure. I assign a buy recommendation for DX based on a high dividend yield at an attractive valuation.