The dispersion stability of soft magnetic carbonyl iron (CI)-based magnetorheological (MR) fluids was improved by applying a unique functional coating composed of a conducting polyaniline layer and a multiwalled carbon nanotube nest to the surfaces of the CI particles via conventional dispersion polymerization, followed by facile solvent casting. The coating morphology and thickness were analyzed by SEM and TEM imaging. Chemical composition of the polyaniline layer was detected by Raman spectroscope, which also confirmed the coating performance successfully. The influence of the functional coating on the magnetic properties was investigated by measuring the MR performance and sedimentation properties using a vibrating sample magnetometer, rotational rheometer, and Turbiscan apparatus. Improved dispersion characteristics of the MR fluid were observed.