Dynex Capital: Is This 16% Yielder a Bargain After the Recent Volatility?

Dynex Capital (NYSE: DX) operates as a mortgage real estate investment trust, or REIT, that invests in a portfolio of mortgage-backed securities, financing these purchases primarily through repurchase agreements. This business model aims to generate income from the spread between asset yields and borrowing costs, which is then distributed to shareholders as a dividend.

Looking at Dynex’s stock chart, we see quite an up-and-down ride. The shares climbed steadily from around $11 in October to nearly $14 in March, but then suffered a dramatic plunge back to $11 in April before partially recovering to around $12.24 today. This volatility reflects the sensitivity of mortgage REITs to interest rate expectations and market turbulence.

Dynex delivered mixed performance in the first quarter of 2025. The company reported comprehensive income of $14.4 million despite posting a net loss of $3.1 million. Book value per share slipped slightly to $12.56, down $0.14 from the previous quarter, resulting in a modest economic return of 2.6% for the quarter.

The company also maintained its monthly dividend of $0.17 per common share, which translates to an annual yield of over 16% at current prices.

Management is preparing for what they call a “more dynamic market.” In the first quarter, Dynex raised $240 million by issuing new stock while buying $895 million in residential mortgage securities and $55 million in commercial mortgage securities.

The company also increased its “to-be-announced” investments – which allow them to gain exposure to mortgage securities without immediately taking ownership – by $430 million. The company maintains solid financial flexibility, with $790 million in available liquidity and a leverage ratio – a key measure of how reliant a company is on borrowed money – of 7.4. (In other words, it’s borrowing $7.40 for every $1 of its own capital. That may seem like a lot, but it’s a reasonable number for a mortgage REIT.)

When we run Dynex through The Value Meter, we see that the stock’s enterprise value-to-net asset value (EV/NAV) ratio sits at 6.38, a bit higher than the average of 5.72 for similar companies.

Meanwhile, its free cash flow-to-net asset value (FCF/NAV) is 0.49% – better than the average of -0.65% for companies with similarly inconsistent cash flow. (Dynex has generated positive cash flow in just two of the last four quarters.)

While Dynex’s premium valuation might raise some eyebrows, its above-average cash flow generation helps justify the price. The company’s economic net interest income rose significantly from $18.8 million to $28 million in the first quarter, showing improving fundamentals despite market challenges.

The Value Meter rates Dynex Capital as “Appropriately Valued” – not a screaming bargain, but fairly priced for investors seeking high dividend income from a company that’s actively positioning for changing market conditions.

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