Developmental dyslexia is a multifaceted disorder of learning primarily manifested by difficulties in reading, spelling, and phonological processing. Neural studies suggest that phonological difficulties may reflect impairments in fundamental cortical oscillatory mechanisms. Here we examine cortical mechanisms in children (6–12 years of age) with or without dyslexia (utilising both age- and reading-level-matched controls) using electroencephalography (EEG). EEG data were recorded as participants listened to an audio-story. Novel electrophysiological measures of phonemic processing were derived by quantifying how well the EEG responses tracked phonetic features of speech. Our results provide, for the first time, evidence for impaired low-frequency cortical tracking to phonetic features during natural speech perception in dyslexia. Atypical phonological tracking was focused on the right hemisphere, and correlated with traditional psychometric measures of phonological skills used in diagnostic dyslexia assessments. Accordingly, the novel indices developed here may provide objective metrics to investigate language development and language impairment across languages.