Dynex Capital: I Am Getting A 13% Yield On My Last Buy

Core Viewpoint - Mortgage real estate investment trusts (REITs) are becoming more attractive as passive income investments due to an anticipated lower interest rate environment, particularly for Dynex Capital, Inc. which focuses on Agency mortgage-backed securities [1][17]. Company Overview - Dynex Capital has a strong focus on Agency residential mortgage-backed securities, with a portfolio valued at $8.6 billion as of June 30, 2024, representing 97% of its total mortgage investments [2]. - Founded in 1987 and publicly listed in 1989, Dynex Capital is one of the longest-operating mortgage REITs in the industry [4]. Financial Performance - Dynex Capital's book value reached $12.50 per share as of June 30, 2024, showing stabilization after a low of $12.25 per share in Q3 2023 [5][13]. - The trust's net interest spread was negative at (1.01)% in Q2 2024, an improvement from (1.15)% in Q1 2024, indicating potential for recovery as interest rates are expected to decrease [7][9]. Investment Thesis - The anticipated reduction in interest rates is expected to enhance the value of mortgage-backed securities, benefiting Dynex Capital's portfolio [9][17]. - The trust offers a monthly dividend of $0.13 per share, translating to a 12.8% dividend yield, making it an appealing option for passive income investors [1][17]. - The current stock price of $12.19 reflects a 2% discount to its book value, suggesting potential for price appreciation as the market adjusts to lower interest rates [13][15]. Market Context - The central bank's recent CPI report indicates cooling inflation, which may prompt a shift in interest rate policy, favoring mortgage trusts like Dynex Capital [12][16]. - Other major mortgage REITs, such as Annaly Capital Management and AGNC Investment Corp., are trading at premiums to their book values, highlighting a favorable market sentiment towards mortgage-backed securities [14].