Should investors take stock in preferred stock? Motley Fool analysts Matt Argersinger and Anthony Schiavone talk with Infrastructure Capital Advisors CEO Jay Hatfield about preferred stocks and why income investors should look beyond index funds.
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A full transcript is below.
This podcast was recorded on Nov.02, 2025.
Jay Hatfield: They’re high quality companies that are public that issue securities that are senior to common, so they get paid first. They have way less risk than the common in the same company. But yet, they have very good yields, which usually results in very good total return.
Mac Greer: That was Infrastructure Capital Advisors CEO Jay Hatfield talking about the advantages of preferred stocks. I’m Motley Fool producer Mac Greer. Now Motley Fool analyst Matt Argersinger and Anthony Schiavone recently talked with Hatfield about preferred stocks and about why income investors should look beyond index funds.
Matt Argersinger: Fools, we are so delighted to have the opportunity to speak to Jay Hatfield, the CEO and Founder of Infrastructure Capital Advisors. He heads up the firm’s research strategy and trading and manages several of the firm’s funds, including the Virtus InfraCap US Preferred Stock ETF, the Tickers PFFA, which is a recent recommendation of our ultimate income service here at the Molly Fool. Jay has three decades of experience in securities and investment industries, including as a portfolio manager at SAC Capital. He also has extensive research and experience and investment banking and played a key role in the formation of NGL Energy Partners, a publicly traded master limited partnership. Jay, thanks for giving the Motley Fool some of your time today.
Jay Hatfield: Thanks, Matt. It’s great to be on.
Matt Argersinger: Before we get to know more about you and Infrastructure Capital Advisors, I was wondering if you could talk a little bit about preferred equities in general because it’s not an asset class that I think the vast majority of our Motley Fool members or readers have experience with. What are in your mind, some of the big advantages of investing in preferred stocks and why is an area of the market that investors should probably pay more attention to?
Jay Hatfield: There’s really two critical advantages of preferred stocks. The first is that they’re high quality companies that are public that issue securities that are senior to common, so they get paid first. They have way less risk than the common of the same company, but yet they have very good yields, which usually results in very good total return. A lot of the yields are 7, 8, 9, like our fund yields around nine right now. You get potential returns that are competitive with the market, probably below the market. Market usually does 10,11. If you’re all in tech stocks, you might do 15 or 20, but with way less risks are about 40 percent as volatile as the market. The default rate has been extremely low, about 0.6 percent a year. You really retain most of that eight percent. It’s a good way to have a baseload, even if you have some speculative stocks where you know you get paid, you get paid every month, and then you can recycle that money either into other stocks or buy more. It’s really a great asset class of public companies. Then we only invest in preferred that are listed, so they’re easier for us to trade, there’s less friction and we usually do it in a way where we don’t have to pay substantial commissions, so really efficient asset class that I would recommend. You can’t do it yourself, it’s a lot of work. It’s hard to build a diversified portfolio, should be diversified with fixed income, not necessarily with stocks, but with fixed income, since they have limited upside, there’s no real advantage to concentration.
Matt Argersinger: Jay, on that point, investors have many choices to generate income today. If you can look at dividend paying stocks, investment grade bonds, high yield bonds, real estates, plenty of other income producing securities out there. What are some of the benefits of preferred equity compared to some of those other income producing alternatives?
Jay Hatfield: The way to think about it is they’re very similar to high yield bonds. They have lower default rates, but similar yields, so probably in the long run, they’ll better returns. They do well. Both high yield bonds and we have a high yield bond fund, BMDS, do well when the stock market’s stable to rising and rates are stable to dropping. We’re in an ideal market for higher risk bonds. For investment grade bonds, there’s a competing fund, B and D, that’s run by Vanguard that is investment grid, but they’re only yielding four and they only benefit when yields drop, and we think yields are going to drop a little but not a lot. You can get better total returns when we’re coming out of a tightening cycle because the Fed causes all recessions, Fed’s loosening now. When the Fed’s loosening, you want to have higher risk, fixed income, not lower risk fixed income.
I’m sure your listeners and viewers have heard from companies like Vanguard that it can be better to be passive when you’re buying mutual funds or ETFs, but that’s only holds true for equities and not fixed income. The reason for that is with equities, they’re cap weighted and that can be great, because when you’re cap weighted, you tend to get the best stocks and you get momentum, which is wonderful. But with fixed income, you’re doing the opposite of what you should do because these securities are callable at par. They’re up, then you want to actually sell them, not buy them. All these large index funds, 70 percent of the market, PFF is the biggest are, in fact, index funds, so they buy high and sell low, and like I said, that actually can work in stock market because you get more in video and get more of the high flying stocks. But it’s a terrible idea. We’re actively managing call risk is really what I was talking about.
They’re doing the opposite. But when security goes above par, we start selling it, usually the index funds because they don’t have any Smart Beta rules. When they get inflows, their market makers just go and buy the securities and we can sell it to them or if they’re rebalancing, which they do every month. We also manage interest rate risk, so we have less interest rate risk when the Fed was tightening because we correctly forecasted that inflation was going to not just rise but skyrocket. We anticipated that. Of course, we’re constantly managing credit risk. You don’t want to be in weak preferred stock credits because they don’t do well if there is a bankruptcy, so you want to sell them. Then finally, we can do new issue, so participate in new issues. The index funds cannot, they get listed and typically all the index funds and bid up those securities, and we start selling to them because they’re good companies and they’re liquid. We start selling to them at higher prices, so we’re able to to get significant gains without taking a significant risk, whereas the index funds cannot do that.
Matt Argersinger: That’s interesting. I can imagine a lot of retail investors in particular, don’t know that, but what you’re saying is it’s actually in the bond and fixed income world and in the preferred equity world, it sounds like active management is what you want to be following.
Jay Hatfield: It’s really critical. Like I said, you can go look, there’s listings and barns and other sources, maybe on Motley Fool for preferred stocks. But you also have to do a lot of analytics because you can say, Oh my gosh, this is great. There’s a Ford preferred trading at a nine yield, but you don’t realize it’s trading at 26 callable at 25 and it’s going to get called time or it might have already been called. You do have to do a lot of work. You don’t want to be in low quality credits. You got to manage the interest rate risk. You can do it yourself, but it’s simpler. I don’t do it in either my personal account. I have levered PFFA my personal account, IRA 60 percent, 65 percent PFFA, and the reason for that is that I don’t want 200 preferred stocks in my IRA. It’s just it would be unbelievable mess. It’s not worth it for me to go in and manage each security and say, I have 1,000 shares of this preferred and it is trading at 25.50 and I’ll sell it. I don’t have time to do that. I have to, of course, manage PFFA but even for anybody, that’s just it’s not really worth their time. If you have a diversified portfolio preferred, why bother? But for us we have hundreds of thousands of shares and we have institutional trading techniques to take advantage of that. There’s economies of scale for having an ETF managed by people like us where it’s absolutely worth our time to worry about whether you sell it at 25.50 or 25 and a quarter or 25 75. A unique situation where, like I said, perfectly reasonable to go buy your own stocks, do your own work, but way simpler or buy an ETF that’s just an index fund, but harder to do it yourself on preferreds and bonds. Bonds aren’t usually listed and can create a big distraction in your portfolio when you should be worrying about selling Tesla at 475, you’re staring at all these preferred moving around by $0.05 every day.
Anthony Schiavone: We’ll wrap up here with two more questions on the economy. I’m curious if you have any thoughts on the massive CAPEX boom that we are currently seeing and the potential implications for real assets. When I look at Big Tech and the mag seven companies, these have historically been asset businesses that’s almost exclusively invested in the digital world. But now those same companies they are investing hundreds of billions into the physical world. I’m curious if you have any thoughts on how this CAPEX boom impacts physical assets like real estates, energy, and some other old economy stocks.
Jay Hatfield: I guess my reaction would be, thank God, because the normal cycle, so the Fed raises rates, of course, the tenure goes up as well, usually about 100 over whatever the Fed raises it to. Then housing and construction crater, which they have and you can get that data on our website, that’s just public data but we summarize it for you in a slide on our website. The old economy, so construction and housing are in recession. Over the last year, those investment categories have dropped. By the way, investment drops create all recessions but intellectual property, aka, AI investment and equipment, which a lot of that’s semiconductors and also could be data centers and it could be power is actually pretty strong. Those two counsel each other out and we have modest growth. We think next year will be really good, but we agree with you 100 percent because we’re around for the Internet boom and it completely busted, investment went down, but it was really, as you’re pointing out, just some laptops and a bunch of tech engineers. It didn’t really have that big an impact on the economy. You had a very shallow recession, 0.6 percent because it didn’t impact data centers and chips and all these other categories. We might get a cycle in the future. It’s not housing driven, but it solely driven by a cycle in tech, because it is impacting the whole economy, not just software and laptops and tech engineers.
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