Dynex vs. Annaly: A Value Investor's Look at Book Value, Yield, and the Monthly Payment Advantage

For the value investor, the appeal of mortgage REITs like Dynex and Annaly is straightforward: they offer a high yield, a form of income that can be compelling in a low-rate environment. Yet, the classic value framework demands we look past the headline number. We must ask: is this yield sustainable? What is the underlying net asset value supporting it? And does the company have a durable competitive advantage to protect that value over time?

The fundamental mechanism behind these double-digit yields is a classic arbitrage. As noted, these trusts borrow short and invest long, using short-term funding like repurchase agreements to purchase longer-term mortgage assets. The spread between the interest earned on those assets and the cost of that funding is the core profit engine. This structure, however, is a double-edged sword. It amplifies returns in a favorable environment but magnifies losses when spreads narrow or funding costs spike. The recent shift in Federal Reserve policy, which has prompted a more positive performance for the sector ahead, is a key variable that can widen or squeeze this critical spread.

The primary metric for assessing intrinsic value here is book value per share. This represents the net asset value of the underlying mortgage portfolio, minus liabilities. A stable or growing book value is essential for a margin of safety. When the market price trades significantly below book value, it suggests the market is pricing in a risk of permanent capital loss-a potential buying opportunity for a patient investor. Conversely, a price above book value, especially if the spread is compressed, can signal overvaluation. The competitive durability of the business model is also paramount. The agency MBS segment, which both DX and NLY focus on, is often seen as having a lower credit risk profile, but it is not immune to prepayment risk and interest rate volatility. The quality of the income stream, therefore, hinges on the trust's ability to manage this leverage and interest rate risk over the long cycle.

A practical advantage for income investors is the predictability of cash flow. Dynex's monthly dividend payment structure, with its $0.17 per share payout, provides a steady and reliable income stream. This can be particularly valuable for investors relying on dividends for living expenses, as it smooths out the quarterly rhythm and offers a more consistent cash flow. The key is to evaluate this monthly dividend not in isolation, but as a percentage of the company's underlying earnings power and its sustainability relative to book value. A high yield is only a true value proposition if it is supported by a durable business and a margin of safety in the asset value.

Comparing the Moats: Leverage, Strategy, and Financial Resilience

The recent performance divergence between the two trusts is stark. Over the past 120 days, Annaly has delivered a 25% return while Dynex has climbed 15.6%. This momentum suggests Annaly's strategy has resonated with the market. Yet, for a value investor, the question is whether this outperformance is built on a durable foundation or is a fleeting reaction to a favorable, and potentially temporary, set of conditions.

The catalyst for this sector-wide optimism is clear: the Federal Reserve's policy shift toward easing. As noted, this easing cycle can support mREIT earnings by typically lowering the short-term funding costs that these trusts rely on. A steeper yield curve, where long-term mortgage yields are higher than short-term borrowing rates, widens the critical spread that drives profits. This environment is a powerful tailwind for the entire agency MBS sector, which both companies operate within.

However, the swing factors that can reverse this tailwind remain ever-present. Funding costs can spike unexpectedly, and prepayment risk-when homeowners refinance their mortgages, forcing the trust to reinvest at lower rates-can compress earnings. The key difference in their competitive moats lies in how they are positioned to manage these risks. Annaly's higher leverage amplifies returns when spreads are wide, but it also magnifies losses when spreads narrow. Dynex, by contrast, has maintained a lower leverage profile, which provides a more resilient balance sheet. In a volatile rate environment, this discipline can be a significant advantage, offering a wider margin of safety.

Viewed another way, Annaly's recent outperformance may reflect a market betting on the continuation of the easing cycle and the sustainability of its higher-leverage model. Dynex's more measured climb suggests investors are valuing its financial resilience over pure momentum. For the long-term investor, the durability of the competitive advantage often matters more than short-term price action. A business that can preserve capital and maintain a steady income stream through cycles is more likely to compound value over time. The lower leverage and focus on agency MBS may give Dynex the more durable moat in the uncertain landscape ahead.

Valuation, Catalysts, and Key Watchpoints

The market has already rewarded Annaly's recent momentum, with its 25% return over the past 120 days reflecting strong investor conviction. Yet for a value investor, the next major catalyst is not a stock price target, but a fundamental update. The company is scheduled to release its financial results for the quarter ended December 31, 2025 on January 28, 2026. This quarterly report will be the first concrete look at how its strategy performed in the final months of the year, providing a critical check on its book value trajectory and portfolio composition. It is the data point that will either validate the sector's optimism or reveal cracks in the earnings foundation.

For both trusts, the key watchpoints are the same. The value of their portfolios-and thus their intrinsic worth-hinges on three variables. First, the trajectory of short-term interest rates will dictate the cost of their essential funding. Second, the steepness of the yield curve determines the width of the spread they can capture. Third, any deterioration in the quality of the mortgage assets they hold, whether through rising delinquencies or a decline in collateral value, would directly threaten earnings and book value. These are the swing factors that can quickly reverse a favorable setup.

The risk here is mean reversion. The market's recent reward for Annaly's performance is a clear bet on the continuation of the easing cycle and the sustainability of its higher-leverage model. If sector fundamentals weaken-say, if funding costs spike or prepayment speeds accelerate-the recent outperformance could unwind rapidly. The value investor must ask whether the current price fully discounts this risk. The recent shift in Federal Reserve policy has been positively received in the market, but policy can change. The competitive moat, whether it's Annaly's aggressive leverage or Dynex's disciplined balance sheet, will be tested when the next cycle turns. For now, the catalyst is the quarterly report; the watchpoints are the fundamentals.