On February 8, AltsDb co-founder Jimmy Atkinson hosted Jay Hatfield, founder and CEO of InfraCap, for a comprehensive one-hour webinar aimed at financial advisors. The discussion centered on income investing strategies, particularly in the context of the current macroeconomic landscape. The event, which also included an audio version of the webinar with an introduction by Andy Hagans, offered a deep dive into how advisors can navigate market volatility and build robust income-generating portfolios for their clients.
The webinar, sponsored by Infrastructure Capital Advisors (InfraCap), highlighted the growing importance of income-focused strategies, especially for investors nearing or in retirement. Hatfield emphasized that a well-structured income portfolio is fundamental to financial security, providing a buffer against market downturns and enabling consistent cash flow to meet living expenses. He illustrated this with a personal anecdote about helping a friend build a diversified portfolio yielding 4-5%, which provided the necessary income to retire comfortably. This approach, he argued, offers not only financial stability but also psychological comfort during periods of market uncertainty, allowing for reinvestment at potentially lower prices and higher yields.
Economic Outlook and Inflationary Pressures
Hatfield presented a contrarian view on inflation, asserting that the Federal Reserve’s current approach is misaligned with the prevailing economic conditions. He detailed his firm’s proprietary real-time inflation index, CPI-R, which he claims has shown a strong negative trend over the past four months, indicating deflationary forces at play, not inflationary ones. This index, he explained, differs from the Bureau of Labor Statistics’ (BLS) methodology by utilizing housing prices as a more current indicator for the shelter component of the Consumer Price Index (CPI), a metric he believes predicts with significant correlation and a 12-month lead.
He posited that high inflation historically stems from two primary drivers: loose monetary policy, which inflates housing costs, and energy price shocks. Hatfield contended that the Fed’s reliance on the Phillips Curve, which links inflation to labor market conditions, is misguided. He pointed to the significant reduction in the money supply by nearly 20% in the previous year through open market operations as the primary reason for the market’s pain in 2022, rather than solely interest rate hikes.
The InfraCap CEO expressed skepticism about the Fed’s inflation forecasts, suggesting they are "out to lunch" and not adhering to the correct indicators. While acknowledging the Fed’s intention to raise rates two more times, he anticipates that the bulk of monetary tightening is behind the economy. This, coupled with post-pandemic tailwinds such as housing and auto shortages and a resilient labor market, leads him to forecast a positive outlook for the S&P 500, with a target of 4,500. He bases this target on an 18.5 times multiple of 2024 earnings estimates, a valuation he believes is supported by a projected 3% yield on the 10-year Treasury.
Strategies for Income Generation
Hatfield then transitioned to discussing specific asset classes and strategies for generating income, emphasizing a balanced portfolio approach. He outlined several fixed-income alternatives, including Treasuries, municipal bonds, corporate bonds, preferred stocks, high-yield bonds, senior loans, and residential mortgage-backed securities. He highlighted preferred stocks as particularly attractive, noting that while the average preferred stock yields around 6%, certain sectors, excluding the heavily weighted financial sector, can offer yields exceeding 7% and even nearing double digits. His firm, InfraCap, actively manages preferred stock ETFs that focus on these less saturated areas.
On the equity side, Hatfield recommended high dividend yield stocks, particularly large-cap dividend aristocrats, citing their historical performance, lower volatility, and attractive income potential compared to growth-oriented sectors like NASDAQ. He noted that his firm’s large-cap dividend fund, ICAP, utilizes modest leverage and preferred stock to achieve yields above 7%, significantly higher than the S&P 500’s current yield of 1.7%.
Asset Class Deep Dive
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High Dividend Stocks: Hatfield emphasized that large-cap dividend stocks have historically delivered returns comparable to the NASDAQ since 1991, but with substantially lower volatility and superior income generation. This makes them particularly appealing for conservative investors.
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Preferred Stocks: He strongly recommended preferred stocks, especially when trading at a discount to their par value. He highlighted that these instruments offer the potential for equity-like returns if they revert to par, along with attractive dividends. With a default rate comparable to investment-grade bonds, actively managed preferred stock funds, like InfraCap’s PFFA, can provide substantial yields (often exceeding 9%) and enhanced safety relative to common stocks. The cumulative nature of most preferred dividends offers a layer of protection, as companies are incentivized to maintain these payments to preserve their credit ratings.
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REITs: While InfraCap offers an ETF focused on REIT preferred stocks, Hatfield expressed a generally bullish outlook on the broader REIT market, including office and retail REITs. He believes that current pessimism has undervalued these assets, and that the market will eventually rebound as cap rates normalize.
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Master Limited Partnerships (MLPs): Hatfield addressed potential negative perceptions of MLPs stemming from past volatility. He explained that modern MLPs have significantly improved their financial structures, with better dividend coverage, lower leverage, and a focus on retaining earnings for growth. He also noted that InfraCap’s corporate structure for its MLP ETF avoids the complexities of K-1 filings often associated with direct MLP investments, offering capital gains treatment instead. Given his expectation of sustained energy prices, he sees MLPs as a potentially strong performer.
Yield Curve Dynamics and Financial Sector Outlook
Regarding the yield curve, Hatfield predicted it would likely remain inverted for the next two years, a consequence of the market anticipating the Fed’s actions ahead of the central bank. He believes long-term rates, such as the 10-year and 30-year Treasuries, will settle around 3-3.25% due to demographic shifts like the "retirement boom" and modest global economic growth.
On the financial sector, Hatfield expressed a positive view, particularly for regional banks. He argued that fears of widespread loan write-offs are overblown, especially given the resilience of the housing and auto markets. He noted that the inverted yield curve, while seemingly counterintuitive, is beneficial for banks as they borrow short-term and lend longer-term, leading to expanding net interest margins. He also suggested that riskier investment banks might see a resurgence later in the year as investors anticipate the Fed’s pause.
Addressing Investor Concerns
In response to a question about why investors might choose alternatives over short-term Treasuries or CDs yielding around 5%, Hatfield acknowledged that while these safe options meet certain yield targets, they forgo the opportunity for higher returns and potential discounts available in other asset classes. He stressed that for many investors, particularly those in retirement, a 5% yield may not be sufficient, and the risk of declining yields upon rolling over short-term instruments could necessitate drawing down principal. He advocated for a more diversified approach that includes assets like preferred stocks and MLPs, which can offer higher and more sustainable income streams.
The webinar concluded with a Q&A session where Hatfield addressed specific investor inquiries, reinforcing his views on inflation, asset allocation, and the mechanics of various yield metrics. He elaborated on the distinction between SEC yield and distribution yield, emphasizing the importance of SEC yield as an objective measure of a fund’s income-generating capacity after expenses. He also touched upon the valuation differences between public and private markets, suggesting that publicly traded income-generating assets are currently trading at attractive discounts.
For financial advisors and investors seeking to learn more about these income investing strategies, InfraCap’s website, infracapfunds.com, was provided as a resource for further information and to access the webinar deck. The event underscored the critical role of income investing in building resilient portfolios capable of weathering economic uncertainties and meeting long-term financial goals.
