What is Preferred Stock?

Preferred shares are different from common stock, the one most people are familiar with. Both are equity in a company, but preferred stock typically pays a higher dividend. And that may be attractive in this current low-interest rate environment because most bonds offer much lower yield.
  • Like bonds, preferred stocks usually pay a fixed coupon rate based on a set “par” value. These investments tend to have very long maturities or no maturity at all, meaning they are perpetual.
  • Most preferred stocks are callable, which means the issuer can redeem them at a set par price before the stated maturity date.
  • Like bonds, preferred stocks generally carry a credit rating from a recognized rating agency, and that rating tends to be a little lower than the issuing firm’s individual bond rating.

WHY CAN Preferred Stock YIELD BETTER THAN 4%?

  • Preferred stocks are designed to provide a steady income through quarterly interest or dividend payments, and their yields tend to be higher than those of other traditional fixed income investments.
  • Preferred shareholders have priority over common stockholders when it comes to dividends, which generally yield more than common stock and can be paid monthly or quarterly. ​​
According to a 2019 preferred stock study done by Nuveen at TIAA, preferred securities have had attractive average yields relative to other asset classes. They have offered more income-generating power than equities and most fixed income asset classes, with the exception of high-yield bonds. Note that our research shows that the preferred stocks with higher yield (4 to 5%) with reasonable quality can be found during the same time period.

HOW TO INVEST IN Preferred Stock BY YOURSELF?

  • Preferred stocks may be an appropriate investment for those who are primarily looking for income-producing investments. These hybrid securities often deliver yields higher than those of common stock or corporate bonds. Before you invest, you need to understand what makes preferred stocks different from common stocks and other high-yield securities, including the risks of available choices and liquidity, credit rating, premium vs. discount, interest rate risk and price volatility, sustainability of dividend payments. 
  • Typically, coupon payments are made every three months, and those payments take precedence over dividends for common stockholders. Most of these investments trade on a stock exchange, so prices can be tracked throughout the day. Even in an extremely low interest rate environment, it is possible to build a diversified prefered stock portfolio to generate 5% or higher income stream without risking the principal over the long term.
  • Prefered Stock Selection
  • High-Yield Bonds
  • ​MLPs
  • Preferred Stock, High-Yield Bond, and MLP ETFs
  • QuantumOnline.com is the best source for information on preferred stocks and other exchange-traded income investments.
  • FINRA Bond Section of the Market Data Center includes general bond market information such as news, benchmark yields, and corporate bond market activity.
  • EMMA is the official source for municipal bond market data and disclosure documents.

Pros:

  • Most preferred stocks are traded on a stock exchange, so there is greater price transparency.
  • There are plenty of choices of preferred stocks delivering quarterly dividend or interest payments with annualized yield over 4 to 5%.
  • Preferred stocks are senior to common stock in payment of interest or dividends, so they are paid out before payments are made to common stockholders.

Cons:

  • Due to their long maturity dates or lack of a maturity date in some cases, the prices of preferred stocks are generally very sensitive to changes in interest rates. If interest rates rise, preferred stock prices tend to fall. This will cause short-term principal loss if you must sell.
  • Because preferred stocks are lower in the capital structure than bonds, the credit rating for preferred stocks is generally lower than that for the bonds the company issues. Therefore, preferred stocks have higher risk.
  • Preferred stock dividends can be fixed or set in terms of a benchmark interest rate​.
  • Adjustable-rate shares specify certain factors that influence the dividend yield, and participating shares can pay additional dividends that are reckoned in terms of common stock dividends or the company's profits.
  • The decision to pay the dividend is at the discretion of a company's board of directors. For many preferred stocks, a missed coupon payment doesn’t necessarily constitute a default. Unpaid coupon payments accrue to holders of cumulative preferred stocks, but they are lost with non-cumulative preferred stock. Before buying a preferred stock, always pay attention to the characteristics of the individual issue.