In this Left Brain Thinking podcast episode, host Chuck Jaffe interviews Mark Hines, Managing Director at Left Brain Investment Research, to explore the idea of a "bond‑like equity" and why AGNC Investment Corp. (ticker AGNC) fits that description. Hines explains that Left Brain, traditionally active in high‑yield bonds, is turning to equities that can deliver similarly high income because credit spreads are currently low. AGNC is a residential mortgage REIT that invests almost exclusively in agency‑backed mortgage‑backed securities (Fannie Mae, Freddie Mac, Ginnie Mae), which are considered very safe and enjoy explicit support from the Federal Reserve. The REIT uses significant leverage—about eight times its book value—to magnify the modest yields on these securities, resulting in a monthly dividend yielding over 8%. Hines highlights several attractive features: a modest discount to book value (implying limited price‑appreciation upside), an internal management structure that reduces conflicts of interest, a dividend payout ratio that leaves room for future increases, and the presence of preferred shares for investors seeking steadier price behavior. He contrasts AGNC with other mortgage REITs (e.g., New York Mortgage Trust, Annaly Capital, New Residential) that hold more exotic or non‑agency assets, emphasizing AGNC’s safety and resilience through the pandemic. The conversation positions AGNC as a hybrid investment—part bond, part stock—suitable for portfolios seeking high, regular income with relatively low risk, especially when traditional high‑yield bond opportunities are scarce.
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Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. Now today we're somewhere in the middle because we're looking at a, a bond-like equity that It's, you know, not quite a stock, could not quit a bond as it has that role in the portfolio. And that's what we're going to discuss with Mark Hines. He's managing director at Left Brain Investment Research. You can learn more about him and the firm at leftbrainir.com and on Twitter @leftbrainir. Mark, good to have you back on Left Brain Thinking. What company's on your mind, or perhaps more importantly, on the left side of your brain today?
Hey, Chuck, I'm happy to be speaking with you again. Yeah, today we're going to talk a little bit about AGNC Investment Corp. Which is a mortgage REIT that pays a big monthly dividend. And then also maybe take a minute and talk a little bit about Left Brain's interest in both high-yield bonds and then, as you mentioned, bond-like equities, which we've been very interested in in recent months. Very happy to be here with you today and excited to get, get talking.
Let's first come back because I said a bond-like equity. Well, we have to explain what that is to you guys because of course equities for you, it's that let's— how quickly can we double? Bonds, it's that potential for price appreciation. So when we're sitting in the middle, what are we looking for and why are we looking for it?
That's the right question, right? So we're looking for that high yield or high income payments. Historically, Left Brain has been very active in the high yield bond market. And that's not to say we just buy some high yield bond index, but actually going out there and analyzing the idiosyncratic risks and selecting individual bonds with high yields. We had a lot of success with that in early 2016 when credit spreads blew out. And then we had some more success with that in the first and second quarter of 2020, again, when the pandemic hit and the credit spreads blew out. But the way the market is right now, credit spreads are so low, we're not finding as many high-yield bond opportunities as we would like. So we've been focusing on these bond-like equities. And really what that is, is just stocks where they can pay a really high rate of income. They won't necessarily have the long-term compounding effect that some of the growth stocks have that we like to invest in, but they do certainly put up some very high income and offer some very attractive investment opportunities.
So let's dig in on AGNC Investment Corp. It's ticker AGNC. Say it out for those of you who are at home, like agency, because that will tell you a little bit about what the company does. This is a residential mortgage REIT, residential mortgage pass-through securities and collateralized mortgage obligations that are coming from agencies. So Fannie Mae, Freddie Mac, Ginnie Mae, et cetera. Those are the types of things you're looking at. Why this particular mortgage REIT right now? I mean, we've heard a lot about what's going on in the real estate market in light of the pandemic. Is that part of the story here?
It is part of the story. And you're right to mention those agency sort of mortgage-backed securities. Government-sponsored agency securities are among the safest, right? So that's one of the reasons we really like AGNC. To back up a little bit and just talk about the business, the business model is pretty straightforward, right? They earn income from interest earned on their investments, and then they minus the cost of borrowing, right? So as an agency or mortgage-backed REIT, a little bit different, not buying actual properties like a lot of REITs are, but buying these mortgage-related assets. And what's special about AGNC is most of those assets, like you mentioned, are very, very safe quasi-government agency type securities. So the residential mortgage-backed securities that they're investing in are very, very safe. And also what's interesting about those is that the government, the Fed in particular, has shown a very, very high interest in supporting those markets, which works out very, very well for AGNC. So in a nutshell, basically they're investing in these interest-bearing agency-backed securities. They apply a little leverage or a little borrowed money, which magnifies the return returns. So they get whatever that interest is produced on these things they're investing in minus the cost of borrowing. So in theory, it's a pretty straightforward business model.
This is a stock with what most people consider a pretty massive yield. I mean, you're looking at a yield north of 8.25%. So how secure is that, and should people be treating this more like a bond than a stock? I mean, as you're putting it into investor portfolios, How much do you say this is a bond replacement versus this is a stock you want to be holding?
It's sort of a mix of the two. It does have a little price appreciation potential. It trades at a small discount to its book value, but realistically, it's, it's like you said, it's that high income. It does pay over an 8% yield, dividend yield paid monthly. It is fairly safe. Again, they're investing in these agency mortgage-backed securities, essentially backed by the government, and the Fed has shown very clearly they're going to step in and support these markets. I think it's important just to note about the business model, AGNC invests in these things that they don't pay very high yields on their own, but they apply leverage to their book to sort of magnify those yields and get up to that above 8% yield. So this is a company that actually will leverage its book around 8 times the book value of its assets, which again are these very safe agency securities, and apply some leverage to that, which really helps magnify the returns. And, and people are okay with that considering again, they're these very safe sort of government-issued type securities. So that's one of the attractive things about AGNC. You know, if we want to run through a few more of them, right, we talked a little bit about that high yield, which is attractive, but it's also internally managed. That's good because it minimizes the conflicts of interest when you're going to invest with this. Not all mortgage REITs are internally managed. We talked a little bit about the price-to-book value, right? It's at a discount to its book value, which is a good thing. It means it has a little bit of price appreciation potential. The dividend right now, the dividend payout ratio is not extremely high relative to what they could be paying out. So this is a dividend that has the potential to increase. And then lastly, again, as I keep mentioning, sort of the government support of these things is really what makes it very, very attractive. We're at an attractive point in the cycle for mortgage REITs. We mentioned the bond market, credit spreads are very, very low, which makes less opportunities there. But in the mortgage REIT space, it's attractive that the markets are calm, not a lot of risk. We've gotten through the pandemic. So this is one you can kind of buy and hang onto for a while. It's really attractive.
In this space, how unique is it for folks who are interested in REITs and specifically residential REITs or mortgage REITs? Would there be others? I mean, did you have to pick between this and the competition? And do you do that looking for like, let's make sure we get the fastest horse, or is this a case of Agency kind of stands out and others maybe not, but it's not about— they're not in the same place.
That's a good question. I think that's the right question to ask. You know, a couple things. AGNC is unique in that it is almost entirely agency securities. Not all mortgage REITs are like that. You know, we talked a little bit about New York Mortgage Trust a few weeks ago. I think one of my colleagues has brought up Annaly Capital. You know, New Residential is a mortgage REIT that does a lot more exotic things like mortgage servicing rights. But AGNC is really attractive just because of the safety aspect of it. It came through the pandemic on a lot more solid footing than some of its counterparts. And then, you know, the other thing worth mentioning, they do have some preferred shares out there. Mortgage REITs tend to offer preferred shares for people who might like slightly lower yield, but a little more steadiness to the stock price over time. So there's a lot of things to consider in the mortgage REIT space. And AGNC is one that kind of rises to the top just because it's well managed, internally managed, and has a unique agency business model. So We really like AGNC at this point.
It's AGNC Investment Corp. Really interesting stuff. Mark Hines, thanks so much for joining me.
Hey, thank you, Chuck. My pleasure.
Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations, but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can learn more about my weekday podcast at moneylifeshow.com. Thanks to my guest, Mark Hines, Managing Director at Left Brain Investment Research. Learn more about the firm and its analysis at leftbrainir.com and follow them on Twitter @leftbrainir. Left Brain Thinking is available every Wednesday. Find it and follow it on your favorite podcast app and plan to put your left brain thinking cap on every week. Until next week, please stay safe.
