Month-to-month Dividend Inventory In Focus: Dynex Capital

Up to date on April eleventh, 2022 by Quinn Mohammed

Dynex Capital (DX) is a mortgage Actual Property Funding Belief (mREIT) that provides an interesting 9.9% yield, making it a doubtlessly enticing 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 firms pay them quarterly.

There are presently solely 52 firms with month-to-month dividend funds. You may see the complete record 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, despite the fact that its dividend cost has been declining lately.

Nevertheless, 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 USA. It invests in company and non-agency MBS consisting of residential MBS, business MBS (CMBS), and CMBS interest-only securities.

Company MBS have a warranty of principal cost 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 cost. Dynex Capital, Inc. was based in 1987 and is headquartered in Glen Allen, Virginia.

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

Supply: Investor presentation

Dynex’s portfolio is structured to be extensively diversified throughout residential and business company securities. This diversified method creates a horny risk-to-reward stability that has benefited the corporate for a few years. Over time, the combination of CMBS and RMBS investments has diminished the destructive 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 affect of limiting portfolio volatility. A good portion of Dynex’s Company 30-year RMBS mounted charge 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 property which are leveraged with brief time period financing. In consequence, the corporate enjoys a extremely versatile portfolio that frees administration to quickly pivot to different enticing alternatives as markets stay risky.

The belief reported fourth-quarter outcomes on February 3^rd, 2022. Earnings accessible for distribution per share got here in at $0.45 for the quarter, and $1.97 for the complete yr 2021. Web curiosity revenue rose 8.3% to $15.6 million year-over-year in This autumn. And adjusted web curiosity revenue fell to $25.1 million from $97.9 million within the prior yr.

The belief additionally reported 5.8x in leverage, inclusive of TBA greenback roll positions, as of December 31^st, 2021. This compares favorably to six.3x as of December thirty first, 2020. E book worth per frequent share stood at $17.99 as of December thirty first, 2021, down from $19.08 one yr earlier than.

Progress Prospects

Provided that rates of interest are anticipated to stay in a narrower and decrease vary for an extended interval than ever seen in latest historical past, returns will probably undergo considerably. It is because the economies of the world will proceed to be weighed down by giant swimming pools of destructive yielding debt, forcing central banks to stay accommodative of their financial coverage.

That being stated, such a low-yield surroundings creates a possibility in prime quality real-asset backed loans. Whereas quite a few short-term headwinds stay, Dynex nonetheless advantages from a number of long-term elements that would allow them to proceed rising.

First, an getting old inhabitants in a low yield world ought to foster a rising demand for the money movement that their enterprise can generate. It will enhance valuations and make attracting capital simpler for mortgage REITs. Second, because the Federal Reserve makes an attempt to cut back its funding in Company RMBS and GSE reform opens new funding alternatives, demand for personal capital within the US housing finance system ought to develop.

Third, the scarcity of reasonably priced housing means that there’s a want for extra funding into the sector.

Supply: Investor Presentation

Lastly, Dynex brings to the desk a number of aggressive benefits which ought to allow it to generate sturdy 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 achieved administration staff with expertise in managing securitized actual property property by means of 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 threat could possibly be one other benefit.

The belief’s normalized diluted earnings per share have been really fairly steady by means of 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 risky earnings-per-share.

One other threat is that prepayment speeds may rise because of seasonal elements. Moreover, the drop in mortgage charges may improve refinancing exercise, additional chopping into income.

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 income. This explains the corporate’s latest sample of dividend reductions since 2019.

Dividend Evaluation

The newest earnings outcomes revealed a dividend that seems lined by earnings. The corporate paid a $0.39 per share dividend within the quarter. On the similar time, Dynex delivered earnings accessible for distribution per share of $0.45.

Primarily based on its present $0.13 month-to-month dividend, Dynex can pay out $1.56 of dividends this yr. Primarily based off of the latest closing worth of $15.77, shares have a yield of 9.9% at this time. On the floor, Dynex seems to be a horny high-yield dividend inventory.

Importantly, the dividend seems lined. We anticipate Dynex to provide $1.79 of earnings accessible for distribution in 2022. This places the anticipated payout ratio at 87%, making it doable that the dividend may be maintained, barring a major decline in earnings accessible for distribution.

Last Ideas

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

The corporate is masking its dividend in the intervening time. However the riskiness of the enterprise mannequin units up Dynex for doubtlessly steep losses if the financial system slips into recession and defaults rise. Shares additionally seem overvalued, with a 2022 P/E of 8.8 in contrast with our truthful worth P/E of 8.0.

This makes the inventory pretty dangerous. Regardless of the excessive dividend yield, traders on the lookout for month-to-month revenue have higher decisions with extra favorable development prospects, and safer dividends.