D
ividend yields of this magnitude are uncommon. I usually view a sustainable 3 % return as robust. When Dynex Capital (DX) posted a 14.6 % trailing 12‑month yield, I was immediately cautious. The REIT has paid monthly dividends since 2008, with modest swings, so a high yield can be acceptable if the payments remain consistent.

    As a mortgage REIT, Dynex can avoid corporate tax by distributing at least 90 % of taxable income. Yet, its heavy exposure to residential mortgage‑backed securities makes earnings highly sensitive to interest‑rate movements. The firm’s payout ratio is steep, and its trailing free‑cash‑flow yield now falls well below the dividend yield—classic warning signs for dividend investors.

    This does not guarantee the dividend will be cut, and a 10–12 % long‑term yield would still be impressive. However, management relies on a complex hedging mix of derivatives, swaps, and futures to navigate rate changes, complicating valuation.

    For those seeking passive income, DX could be a speculative play, but it should not occupy a top spot in a dividend portfolio. Bram Berkowitz, The Motley Fool, and the Motley Fool have no positions in these stocks and disclose their policies.