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Dynex Capital Inc.: Still Not Suitable For Retirement Accounts Part 2

2019-09-12

Introduction

This is the second in a series of articles where I will be covering the historical performance and operating results of popular and highly recognized mREITs (mortgage REITs).  In my first installment, I covered Annaly Capital Management (NLY) found here, with this installment I’m going to cover Dynex Capital Inc (DX).

However, before I go further, I wanted to respond to some significant pushback I received in the comment thread of my first installment on Annaly Capital Management (NLY).  Several comments criticized me because I admitted that I did not understand the complex business model of mREITs. 

Here is what I said: “In addition to what I covered above, one of my primary issues with including mortgage REITs in retirement accounts is the complexity of their business models. As the title of this section suggests, I find the business model of mortgage REITs both complex and confusing.”

My retort to those critics would be that my article was suggesting that mREITs were too complex for most lay investors to understand.  As a professional with 50 years’ experience, I included myself in that universe even though I am a professional.  Therefore, I consider that reason enough for most retired investors living off their income who also need that income to grow to avoid this asset class.

Furthermore, these statements were associated with the sage advice of the venerable Warren Buffett as follows: “Investment Must Be Rational; If You Don’t Understand It, Don’t Do It.” Therefore, this supports my contention that mREITs are not suitable for most retirement accounts due to their complexity.

I later added the following: “Consequently, I personally have little confidence in evaluating mREITs, and even less in attempting to forecast what their futures would hold for me as a shareholder.”  Once again, I stand by that statement which I believe supports my contention that mREITs are not suitable for most retirement accounts.  I continue to stand by that position.

Nevertheless, I will further retort those criticisms by stating that I am fully qualified to evaluate any stock’s historical performance and operating history whether I understand its business model or not.  The results that I evaluated and reviewed in my first article, and I will be doing so again in this article, can be understood by all – yours truly included.  Consequently, I will repeat that I am fully qualified to evaluate the historical performance both operating and investment results of mREITs and any other investment that I choose to evaluate.

Additionally, I will conclude this introduction by adding that one of the benefits of initially evaluating any company’s historical performance and operating results is that it provides the opportunity to easily determine whether (or not) a given stock is due diligence and research worthy.  I am on record many times of supporting and vigorously recommending that comprehensive research and due diligence should always be performed before any investment is made. 

On the other hand, to my way of thinking, there is no reason to waste that time and effort on something that you would not (or perhaps should not) invest in.  Since a review of the historical performance and operating results of several mREITs that I have thus far examined reveals a high degree of inconsistency with operating results and dividends, I have elected to forgo any further research or due diligence.  Simply stated, they are clearly not my cup of tea and I consider them too risky, complex and erratic to be included in most prudently-managed retirement portfolios.

Dynex Capital Inc. Historical Operating and Performance Results

Since going public in 1989, Dynex Capital has taken their shareholders on quite a roller coaster ride.  Since the research tool I utilize (FAST Graphs), only goes back approximately 20 years, I had to look to another source to see the price history.  I found the full price history on Macrotrends, I believe the graphic illustrates my roller coaster comment:

Dynex Capital – 30 Year Stock Price History Courtesy of Macrotrends

Nevertheless, since these articles I am writing on mREITs are primarily focused on dividends and yield, I think it’s important to point out that Dynex Capital has only paid dividends since 2008.  However, a quick glance at the following earnings, price and dividend record of Dynex Capital clearly reveals that the company has cut their dividend no less than 5 times since 2008.  The reader might also note that the price has steadily decreased along with earnings and the decreasing dividend.

When we examine the actual performance results since the company has paid a dividend, we discover that it has produced $11,916.61 worth of cumulative dividends based on a one-time $10,000 investment since December 31, 2007.  That is significantly more dividend income than the average company as measured by the S&P 500 would have produced over that timeframe.

On the other hand, that original $10,000 investment would only be worth $5610.69 today representing a -4.8% annualized loss.  Add the two together, and we discover that the company has dramatically underperformed the average stock as measured by the S&P 500 since it has been paying a dividend. 

However, as I also indicated in my first installment covering Annaly, I would question whether the average retiree would have been willing to hold onto this company over that timeframe so that they could have achieved those dividend income results. A closer look suggests that a buy-and-hold approach to Dynex since 2008 would have presented several challenges.  Not just a shrinking capital base, but also the 5 consecutive and rather severe cuts in the dividend.

Most retirees that I work with are looking for steadily-increasing dividend income to fund their retirement.  I am confident they would be quite stressed to see the dividend income on their holding fall so dramatically and consistently.  Once again, I do not consider mREITs suitable for retirement accounts.  They might work for some more aggressive investments, but I believe most retired investors living off their income would feel rather insecure watching these results over time.

Common Shares Outstanding: Dynex Also Dilutes Shareholders Since Paying A Dividend

Dynex Capital Two Reverse Stock Splits Since 1997

To add further complexity to attempting to analyze Dynex Capital, the company has had tw reverse stock splits since 1997.  Here is a link to their recent press release announcing their most recent reverse split; it was implemented in June 2019.

“The Company is implementing the reverse stock split with the objective of making the common stock more attractive to a broader range of investors as well as a more cost-effective investment, which it believes will enhance the liquidity of the holders of the Company’s common stock. The Board also recognized that our shareholders and potential shareholders have share price minimums and after the reverse stock split the Company’s shares are expected to trade above those minimums.”

FAST Graphs Analyze Out Loud Video: Dynex Capital Inc.

Proponents of mREITs like to tout the notion that dividend growth stocks are potentially overvalued because of their expected growth. Consequently, they believe that future growth will stagnate when the economy slows. In contrast, they will also promote mREITs’ tendency to outperform when the market is underperforming.

This is fine and good and has proven true over our last two recessions. On the other hand, there is a problem with this when your investment horizon is long term. What these promoters do not point out is the fact that recessions and bad markets tend to be very short-lived, whereas bull markets tend to last much longer. Consequently, the advantage that a mREIT like Dynex Capital Inc. might offer during a recession tends to be very short-lived.

Furthermore, several people commented that you can buy an mREIT just as you enter a recession and then sell it as the recession ends.  My personal retort to that notion would be just how will you know?  This reminds me of the thermos bottle analogy.  A thermos bottle keeps hot things hot and cold things cold – but how does it know?

In the video that follows, I will illustrate this performance anomaly where I will show Dynex Capital’s performance over our last two recessions.  Additionally, I was also criticized in my previous installment about focusing on negative performance history while ignoring good history.  Therefore, with this video I will be providing Dynex Capital’s historical performance over every timeframe since 2008.  This can be and will be accomplished very quickly, and therefore, provide significant insight into how this company has performed since it’s been paying a dividend.  Therefore, I will be acting as Joe Friday on the old dragnet series as I will be presenting “just the facts ma’am, nothing but the facts.”  As a result, the most insightful and I consider important part of this article will be found in the video, please watch it for your own edification.

Summary and Conclusions

I do believe that there are certain circumstances and investor types that might find mREITs viable investments, even attractive long-term investments. The secret to making a mREIT a successful long-term investment is to diligently reinvest the dividends. Investors that can do this, and can do it over the long run, can produce acceptable and even attractive long-term returns through investing in mREITs.

However, I do believe that these investor types are rare and in the minority. In reality, it takes a great deal of fortitude to be able to have the confidence to stay the course long enough in mREITs in order to take advantage of the benefits that they offer. Most investors are not capable of enduring significant volatility in both price and dividends.

On the other hand, for the reasons stated in the article and clearly illustrated in the video, I don’t consider mREITs suitable selections for retirement accounts despite their high yields. Therefore, this will be my 2nd of 7 installments on some of the most popular and widely-recognized mREITs. My primary purpose and objective is to ensure that all investors, and especially retired investors, understand the reality of investing in high-yielding mREITs.

Disclosure:  No position.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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