Dynex Capital's Dividend Strategy: A Beacon of Income in a Rising Rate World

Dynex Capital (NYSE: DX) has long been a stalwart in the real estate investment trust (REIT) sector, leveraging its focus on real estate financing to deliver consistent returns. As central banks around the world raise rates to combat inflation, the company's dual-pronged dividend strategy—bolstered by its floating-rate preferred shares—positions it as a compelling choice for income investors. Here's why both its common and preferred shares deserve a closer look.

The Preferred Play: DXPRC's Floating Rate Advantage

Dynex's 6.900% Series C Fixed-to-Floating Rate Preferred Stock (DXPRC) has transitioned into a high-yield instrument for income seekers. As of June 2025, the security now offers an annualized dividend yield of 9.98%, driven by its floating-rate formula: SOFR (Secured Overnight Financing Rate) + 5.723%. This structure ensures that as short-term rates rise, so does the dividend payout—a stark contrast to fixed-rate preferreds that become less attractive in a high-rate environment.

The mechanics are straightforward: the preferred's rate is tied to the Three-Month CME Term SOFR, a benchmark replacing the discontinued LIBOR. For the quarter ending July 2025, the SOFR component alone contributed 4.26% to the dividend, with the 5.723% spread acting as a buffer. This hybrid model shields investors from the risk of declining yields while capitalizing on rising rates.

Investors should note that DXPRC is callable by Dynex starting April 15, 2025, at $25 per share. However, with the current yield far exceeding its original fixed rate of 6.9%, the company has little incentive to redeem it unless rates decline sharply—a scenario unlikely in the near term.

The Common Stock: Dividend Durability Amid Rate Pressures

While the preferred shares grab headlines, Dynex's common stock (DX) offers a blend of income and equity upside. Despite the Federal Reserve's aggressive rate hikes, Dynex has maintained its quarterly dividend of $0.23 per share, or 9.2% annually based on its recent price of $9.80. This consistency underscores the company's robust liquidity and disciplined capital allocation, which prioritize dividend sustainability over aggressive expansion.

Dynex's strategy of focusing on floating-rate commercial real estate loans and agency-backed mortgages aligns neatly with rising rates. These assets reprice upward as rates climb, shielding net interest income from compression. Management's emphasis on risk management—evidenced by its conservative leverage ratios and diversified portfolio—further bolsters confidence in the common dividend.

Why Investors Should Pay Attention

For income portfolios, DXPRC is a must-own in this rate environment. Its 9.98% yield, paired with quarterly payments and a floating-rate mechanism, offers both income and a hedge against further rate increases. Meanwhile, DX's common stock suits investors seeking a balance of yield and equity growth, particularly if they believe real estate financing will remain resilient.

Risks and Considerations

No investment is without risks. Rising rates could slow real estate transactions, potentially reducing Dynex's originations. Additionally, the preferred's floating rate means its price may fluctuate more than fixed-rate securities. However, the 5.723% spread provides a significant cushion, and the common stock's dividend coverage remains healthy.

The Bottom Line

Dynex Capital's dual dividend strategy is tailor-made for today's economic landscape. The Series C Preferred (DXPRC) delivers a high, inflation-protected yield, while the common stock (DX) offers income stability backed by a disciplined REIT. For income-focused portfolios, DXPRC is a no-brainer; for balanced investors, DX provides a gateway to a resilient sector. In a world where yield is scarce, Dynex's dividends are a rare bright spot.

Investment Recommendation:
- Aggressive Income Investors: Allocate 5-10% of a portfolio to DXPRC for its sky-high yield and rate-linked upside.
- Balanced Investors: Use DX as a core holding for its dividend consistency and REIT diversification benefits.

As rates climb higher, Dynex's strategy isn't just sustainable—it's a model for how to thrive in a tightening financial environment.