Building a Core Income Portfolio: PFFA

Part 1 in the Core Income Portfolio series

Lincoln Wood
May 29, 2025

Part 1: The Preferred Path to Monthly Income

Welcome to Dividend Dynamo, where we're building a compact, fund-focused income portfolio for regular investors who prefer their dividends like their coffee—strong, regular, and without too much complexity.

The Mission: A Tight Core Portfolio

Before we dive into our first fund, let's be clear about what we're building here. This isn't going to be a sprawling collection of 50 holdings that would make even a spreadsheet weep. No, we're constructing a lean, mean, income-generating machine using only funds—no individual stocks, no options strategies, no cryptocurrency yield farming (save that excitement for another day).

Why only funds? Because most of us have day jobs, families, and Netflix series to finish. We want professional management, instant diversification, and the ability to check our portfolios without a PhD in financial analysis. Think of it as the difference between cooking a five-course meal from scratch versus ordering from your favorite restaurant—both can be delicious, but one lets you actually enjoy your evening.

PFFA: The Income Fund That Works Harder Than You Do

The Basics: What's Under the Hood

The Virtus InfraCap U.S. Preferred Stock ETF (PFFA) isn't your grandmother's bond fund—though she'd probably appreciate the monthly income. This actively managed ETF focuses on preferred stocks, those peculiar securities that can't quite decide if they want to be stocks or bonds, so they split the difference and offer the best of both worlds.

Current Yield: A mouth-watering 9.72%
Distribution Schedule: Monthly (because waiting three months for income is so 20th century)
Expense Ratio: 2.48% (yes, it's high—we'll explain why it's worth it)
Assets Under Management: ~$1.5 billion

Why PFFA Deserves Prime Real Estate in Your Portfolio

1. The Monthly Income Machine

While most dividend funds make you wait around like you're in a DMV line with their quarterly payments, PFFA delivers income monthly. This isn't just convenient—it's practical. Your bills don't wait three months, so why should your income? The fund currently distributes approximately $0.17 per share monthly, translating to that delicious ~10% annual yield.

2. Active Management That Actually Earns Its Keep

Yes, that 2.48% expense ratio might make index fund enthusiasts clutch their pearls, but here's where PFFA earns its fees. The fund doesn't just buy and hold preferred stocks like a passive fund would. Instead, the management team:

Employs modest leverage (typically 20-30%) to juice returns without going full YOLO - this borrowing cost is directly reflected in the expense ratio
Actively manages call risk (because having your highest-yielding holdings called away is about as fun as a root canal)
Rotates sectors strategically rather than being wedded to the financial sector like most preferred funds

3. The Contrarian Sector Allocation

While traditional preferred ETFs pile into financials like teenagers at a free pizza party (often 60-70% allocation), PFFA takes a different approach. The fund spreads its bets across utilities, real estate, and infrastructure … sectors that march to their own drummers and can provide stability when banks decide to have their periodic existential crises.

The Par Value Arbitrage Game

Here's where PFFA's active management really flexes its muscles in a way that'll make passive fund investors slightly jealous. Most preferred stocks are issued with a $25 par value, consider it their "home base" price. But here's the thing: preferred stocks don't read the memo about staying put at par value. They bounce around like ping-pong balls based on interest rates, credit conditions, and market sentiment.

When markets get jittery or rates spike, quality preferred stocks can trade at $22, $23, or even lower, essentially putting them "on sale" below their par value. Conversely, when everything's rosy and investors are chasing yield, these same preferreds might trade at $26, $27, or higher. It's like watching the stock market's version of seasonal clothing sales, except the seasons change based on Federal Reserve meetings rather than the weather.

PFFA's management team turns this volatility into profit through a deceptively simple strategy:

Hunt for Bargains: When quality preferreds trade below $25, they swoop in like savvy shoppers at a clearance sale
Collect the Dividends: While patiently holding these below-par gems, they're collecting those fat dividend payments (often 6-8% annually)
Sell at Premium: When market sentiment improves and these preferreds climb back above par value, they sell and bank the capital gains
Rinse and Repeat: The profits get recycled into the next batch of undervalued preferreds, creating a continuous cycle of opportunistic investing

This isn't day-trading madness—it's patient, calculated moves that can add 2-4% annually to the fund's total return on top of the dividend income. It's like having a professional bargain hunter managing your money, except instead of garage sales, they're shopping in the $1.5 trillion preferred stock market.

The beauty? You get all this active management while collecting that sweet monthly income. It's the investment equivalent of having your cake and eating it too, assuming your cake pays you dividends while you're deciding when to take another bite.

The Opportunity Knocking at Your Door

Here's where it gets interesting. Historical data shows that buying PFFA during market pullbacks has been like shopping during Black Friday, except the deals actually last. According to recent analysis, investors who bought during dips have seen returns of 24-32% within a year, and that's before counting the juicy dividends.

With the Federal Reserve potentially pivoting to rate cuts in 2025, PFFA sits in a sweet spot. Rate cuts would:

Reduce the fund's borrowing costs (making that leverage even more attractive)
Support valuations in rate-sensitive sectors like utilities and real estate
Make that 10% yield look even more attractive compared to falling bond yields

The Reality Check: Understanding the Risks

Let's not sugarcoat it—PFFA isn't without risks, and anyone who tells you a 10% yield comes without strings attached probably has a bridge to sell you:

Credit Quality: The fund focuses on below-investment-grade preferred stocks (BB+ and lower). These aren't junk bonds, but they're not exactly Treasury-level safe either.
Leverage Amplification: That 20-30% leverage that boosts returns? It's a double-edged sword that can amplify losses during market stress.
Interest Rate Sensitivity: While positioned well for falling rates, a surprise rate hike party from the Fed could create headwinds.
The Price of Active Management: That 2.48% expense ratio means the fund needs to outperform its cheaper alternatives by at least that much just to break even.

Implementation: Making PFFA Work for You

For Dividend Dynamo, we're targeting PFFA as a 10-15% core position. Here's the game plan:

Dollar-Cost Average: Split your intended investment over 3-6 months. The market's volatility is your friend when building a position.
Reinvest During Accumulation: Use those monthly dividends to buy more shares while building your position. Compound interest is the eighth wonder of the world, after all.
Balance with Quality: Pair PFFA with investment-grade bond funds or high-quality dividend ETFs to balance the risk profile.

The Bottom Line

PFFA isn't trying to be everything to everyone. It's a specialized tool that excels in one area: generating a high monthly income through professional management, navigating the complex preferred stock market. The 10% yield isn't a free lunch—it comes with real risks—but for income-focused investors who understand what they're buying, PFFA offers a compelling combination of yield, monthly cash flow, and active management.

In our Dividend Dynamo portfolio, PFFA is part of the income engine … the fund that ensures the lights stay on and the dividends keep flowing while we build around it with more conservative holdings. It's not suitable for your entire portfolio, but as a core income position, it's hard to beat.

Next in the Dividend Dynamo series: We'll explore a global dividend fund that lets you collect income from around the world without needing a passport. Stay tuned!