Dynex Capital Inc: Overlooked Monthly Dividend Stock Now Pays 13.1%
This High-Yield Stock Looks Interesting
Most people have never heard of this Glen Allen, Virginia-based real estate investment trust (REIT), but the company offers one of the biggest payouts in the current stock market.
I’m talking about Dynex Capital Inc (NYSE:DX), an internally managed REIT that specializes in investing in mortgage assets. Rather than owning physical properties, the company has a portfolio that consists mostly of agency residential and commercial mortgage-backed securities. (Source: “First Quarter 2019 Earnings Presentation,” Dynex Capital Inc, May 1, 2019.)
By collecting regular payments from the underlying mortgages, this REIT can offer a generous dividend policy to investors.
What’s more is that, rather than paying shareholders quarterly like most dividend stocks, Dynex Capital follows a monthly dividend policy. This is partly due to the nature of the company’s business: most borrowers have to make mortgage payments every month, so Dynex Capital earns a predictable monthly income stream.
With a monthly dividend rate of $0.18 per share and a price of $16.52 at the moment, DX stock provides an annual yield of 13.1%.
Can Dynex Capital Inc Outearn Its Dividends?
Now, given that we live in an era when most companies don’t yield a third as much as 13.1%, it’s only natural to ask whether this monthly dividend stock’s payout is too good to be true.
Well, if you take a look at the company’s most recent earnings report, you’ll see that Dynex Capital earned a core net operating income of $0.18 per share in the first quarter of 2019. (Source: “Dynex Capital, Inc. Reports First Quarter 2019 Results,” Dynex Capital Inc, May 1, 2019.)
Since the company pays monthly dividends of $0.18 per share, its dividend obligation would be $0.54 per share on a quarterly basis. So does that mean Dynex Capital stock did not cover its payout in the first quarter?
Not so fast. You see, it’s true that the company currently has a monthly dividend rate of $0.18 per share, but that’s the result of a one-for-three reverse stock split that took place in June. Prior to that, its monthly dividend rate was actually $0.06 per share. (Source: “Dynex Capital, Inc. Declares Monthly Common Stock Dividend for June 2019 and Announces Implementation of Reverse Stock Split,” Dynex Capital Inc, June 6, 2019.)
In other words, Dynex Capital actually paid $0.18 per share in total dividends for the first quarter of 2019—the same as its core net operating income. So the company did cover its payout for the quarter, although it did not leave any margin for error.
Looking further back, we see that in 2018, Dynex earned a core net operating income of $0.73 per share while paying 12 monthly dividends of $0.72 per share. Therefore, the company managed to outearn its dividend last year, albeit by a very thin margin. (Source: “Dynex Capital, Inc. Reports Fourth Quarter and Full Year 2018 Results,” Dynex Capital Inc, February 7, 2019.)
Dynex Capital Inc (NYSE:DX) Stock Chart
Chart courtesy of StockCharts.com
As you’d expect from most double-digit yielders, Dynex Capital is not exactly a high-flying ticker. Over the past six months—a period when the U.S. stock market soared to new heights—DX stock slipped 6.5%. Of course, the sheer size of the dividend yield offered by the company could help cushion its share-price volatility.
However, keep in mind that, in the past, Dynex Capital’s payouts weren’t exactly carved in stone; management has reduced the dividend before. For instance, in 2015, the company lowered its quarterly dividend rate (back then, it paid quarterly dividends rather than monthly ones) from $0.25 to $0.24 per share, marking a four percent decrease. In 2016, Dynex cut its quarterly dividend by another 12.5% to $0.21 per share, and then to $0.18 per share in 2017. (Source: “Dividends,” Dynex Capital Inc, last accessed July 9, 2019.)
The Bottom Line on DX Stock
While the lackluster share price performance and dividend cuts are things that happened in the past, they should serve as a reminder that, in the world of double-digit yielders, there could be a lot of uncertainty.
Still, the latest results suggest that Dynex Capital Inc generated enough profits to support its current dividend policy. If the company can continue doing that, its 13.1% yield would be worth a look for yield-seeking investors.