Up to date on February twenty fifth, 2023 by Samuel Smith

Dynex Capital (DX) is a mortgage Actual Property Funding Belief (mREIT) that provides an interesting 11.4% yield, making it a doubtlessly engaging excessive yield inventory.

Dynex Capital additionally pays its dividends on a month-to-month foundation. That is uncommon in a world the place the overwhelming majority of corporations pay them quarterly.

There are presently solely 50 corporations with month-to-month dividend funds.

You’ll be able to see the total listing of month-to-month dividend shares (together with related monetary metrics equivalent to dividend yields, payout ratios, and extra) by clicking on the hyperlink beneath:

 

Dynex Capital’s excessive dividend yield and month-to-month dividend funds make it an intriguing inventory for dividend traders, regardless that its dividend fee has been declining lately.

Nonetheless, as with many high-dividend shares, the sustainability of the dividend is a vital consideration. This text will analyze the funding prospects of Dynex Capital.

Enterprise Overview

Dynex Capital is a mortgage Actual Property Funding Belief. As a mortgage REIT, Dynex Capital invests in mortgage-backed securities (MBS) on a leveraged foundation in the US. It invests in company and non-agency MBS consisting of residential MBS, industrial MBS (CMBS), and CMBS interest-only securities.

Company MBS have a warranty of principal fee by an company of the U.S. authorities or a U.S. government-sponsored entity, equivalent to Fannie Mae and Freddie Mac. Non-Company MBS don’t have any such warranty of fee. Dynex Capital, Inc. was based in 1987 and is headquartered in Glen Allen, Virginia.

The corporate is structured to have inner administration, which is mostly optimistic as a result of it may possibly cut back conflicts of curiosity. Moreover, after they improve whole fairness, there isn’t a materials impression on working bills. Over time, Dynex’s administration staff has constructed a robust monitor file of producing engaging whole returns for shareholders:

Supply: Investor presentation

Dynex’s portfolio is structured to be extensively diversified throughout residential and industrial company securities. This diversified strategy creates a gorgeous risk-to-reward stability that has benefited the corporate for a few years. Over time, the combo of CMBS and RMBS investments has diminished the unfavourable impacts of prepayments on portfolio returns. Moreover, company CMBS acts as a cushion within the occasion of sudden volatility in rates of interest.

Lastly, the high-quality CMBS IO are chosen for shorter length and better yield, with the meant impression of limiting portfolio volatility. A good portion of Dynex’s Company 30-year RMBS mounted price portfolio has prepayment safety through limits on incentives to refinance.

Administration anticipates opportunistically rising leverage within the high-quality asset portfolio whereas avoiding credit score delicate belongings which might be leveraged with brief time period financing. Because of this, the corporate enjoys a extremely versatile portfolio that frees administration to quickly pivot to different engaging alternatives as markets stay unstable.

On January 30, 2023, Dynex Capital launched its monetary outcomes for the fourth quarter and full yr 2022. As of December 31, 2022, the e book worth per widespread share was $14.73. Within the fourth quarter of 2022, the corporate achieved a complete financial return of $0.89 per widespread share, equal to six.2% of the start e book worth, whereas for the total yr, the return was $(1.71) per widespread share, representing (9.5)% of the start e book worth.

For the fourth quarter of 2022, Dynex reported a complete earnings of $1.17 per widespread share and a web earnings of $0.85 per widespread share, whereas for the total yr, the great loss was $(1.24) per widespread share, and the web earnings was $3.19 per widespread share. The corporate’s realized positive factors on rate of interest hedges, included in GAAP web earnings, have been $204.8 million and $690.7 million for the fourth quarter and full yr of 2022, respectively.

For the fourth quarter, the REIT taxable earnings benefited from an estimated $11.8 million, or $0.24 per widespread share, as a result of amortization of deferred tax hedge positive factors, whereas for the total yr, the profit was $22.5 million, or $0.53 per widespread share.

As of December 31, 2022, the leverage, together with TBA greenback roll positions, was 6.1 occasions shareholders’ fairness. The corporate raised $92.4 million of fairness capital in the course of the fourth quarter by issuing widespread inventory via at-the-market (“ATM”) transactions, bringing the whole capital raised for 2022 to $246.9 million, web of $3.1 million issuance prices.

Progress Prospects

With rates of interest rising quickly and the mortgage market presently affected by plummeting demand, Dynex could have a difficult time rising. On prime of that, a recession is taken into account more and more probably, which in flip may result in a soar in defaults on Dynex’ investments, posing an extra headwind to progress. Because of this, when mixed with Dynex’s sky-high payout ratio, we expect earnings to say no within the coming years, resulting in a possible dividend lower.

Supply: Investor Presentation

Lastly, Dynex brings to the desk a number of aggressive benefits which ought to allow it to generate robust returns for traders all through enterprise cycles on the again of those long-term tailwinds.

Aggressive Benefit & Recession Efficiency

Dynex possesses some aggressive benefits, which can bolster investor returns all through enterprise cycles. These benefits embrace the completed administration staff with expertise in managing securitized actual property belongings via a number of financial cycles. Moreover, the belief’s give attention to sustaining a diversified pool of extremely liquid mortgage investments with the smallest quantity of credit score danger might be one other benefit.

The belief’s normalized diluted earnings per share have been really fairly secure via the final recession, although shares nonetheless bought off very closely, shedding about 40% of their market worth. All in all, there’s little margin of security right here due largely to the payout ratio being so excessive, mixed with extremely unstable earnings-per-share.

One other danger is that prepayment speeds may rise as a result of seasonal components. Moreover, the drop in mortgage charges may improve refinancing exercise, additional chopping into earnings.

Whereas some cash-out refinancing is already factored into the corporate’s prepayment expectations and their portfolio has been structured to hedge in opposition to a few of this, there’ll nonetheless probably be some misplaced earnings. This explains the corporate’s latest sample of dividend reductions since 2019.

Dividend Evaluation

The dividend was not totally lined by earnings in fiscal 2022, with $1.04 in earnings per share in comparison with a $1.56 per share dividend payout. In 2023, we expect this sample to repeat itself with solely $1.14 in earnings per share anticipated to be generated this yr. Because of this, we count on the dividend to be lower sooner or later over the subsequent half decade.

Last Ideas

Dynex Capital’s excessive dividend yield and month-to-month dividend funds make it stand out to high-yield dividend traders. Nonetheless, we stay extraordinarily cautious on the inventory.

The corporate is just not protecting its dividend with earnings per share. Moreover, the riskiness of the enterprise mannequin units up Dynex for doubtlessly steep losses if the financial system slips into recession and defaults rise.

This makes the inventory pretty dangerous. Regardless of the excessive dividend yield, traders searching for month-to-month earnings have higher selections with extra favorable progress prospects and safer dividends elsewhere.

In case you are keen on discovering extra high-quality dividend progress shares appropriate for long-term funding, the next Positive Dividend databases can be helpful:

The main home inventory market indices are one other stable useful resource for locating funding concepts. Positive Dividend compiles the next inventory market databases and updates them month-to-month: