Byte # 48: Tired of 4% CDs? Look at the “Hidden Gems” in Banking

Dear readers,

With market volatility rising and macro concerns weighing on sentiment, many investors are asking a simple question:

Where can I earn solid income without taking on full equity risk?

If that resonates, it may be time to look beyond 4% CDs and explore Tier-1 bank preferred shares.

These often-overlooked securities sit between bonds and stocks—offering higher income than traditional fixed income, while ranking ahead of common stock in the capital structure.

🚀 The Strategy: Yield + The "Pull to Par"

Most preferred stocks are issued at a $25.00 "par value." Right now, many are trading at a discount. If the bank "calls" (buys back) the stock, they must pay you the full $25.00.

The opportunity: You collect steady quarterly dividends while you wait, and if a call happens, you pocket the difference between your purchase price and $25.00 as a capital gain.

🎓 The Basics: What You Need to Know

Before we dive into the picks, let’s demystify the jargon:

The coupon rate is the annual percentage paid on the $25 par value. For example, a 5% coupon translates to $1.25 in annual dividends per share.

What matters more for investors today, however, is the current yield—your return based on the price you actually pay. If you buy that same share at $20, your yield becomes 6.25% ($1.25 ÷ $20), reflecting the benefit of purchasing at a discount.

You may also hear the term “yield to cost,” which refers to the yield based on your original purchase price. While helpful for tracking your personal return over time, the more relevant metric when comparing opportunities is the current yield, since it reflects today’s market pricing.

You’ll also come across SOFR (Secured Overnight Financing Rate), a key benchmark for short-term interest rates. For preferred shares with floating coupons, dividends are periodically reset based on a formula such as SOFR plus a fixed spread. In other words, your income can adjust as interest rates change.

🏦 The Heavy Hitters: Goldman Sachs vs. Capital One

Let’s look at two examples that highlight different ways to approach this space.

The preferred shares of Goldman Sachs (GS.PR.A) are structured as a floating-rate instrument. The coupon resets every three months based on 3-Month Term SOFR plus 1.0116%. With SOFR currently in the ~3.6–3.7% range, the coupon comes out to roughly 4.7%, translating to about $1.17 in annual income per share.

At a recent price of around $19.50, that equates to a current yield of roughly 6%. The key appeal here is flexibility—if interest rates remain elevated, the income adjusts upward, providing a degree of protection in a “higher-for-longer” environment.

In contrast, Capital One (COF.PR.J) offers a fixed-rate structure, paying a steady $1.20 annually. With the shares trading closer to $18.30, the current yield is approximately 6.5%.

What makes this particularly interesting is the valuation gap: if the shares are eventually redeemed at $25—or even drift closer to that level over time—the potential upside is meaningfully higher. This makes it more of a “deep value income” play compared to the floating-rate alternative.

⚠️ Critical Risks: What to Keep in Mind

First, these preferred shares are non-cumulative, meaning that if a dividend is skipped, it is not owed to you later. That said, there is an important constraint: if a bank skips a preferred dividend, it is typically restricted from paying dividends on its common stock or executing share buybacks.

In practice, this makes skipping preferred dividends a last-resort decision—something banks generally try hard to avoid, though it is not impossible in extreme scenarios.

Second, liquidity can be more limited. Preferred shares tend to trade far fewer shares daily compared to common stock, which can result in wider bid-ask spreads. For that reason, it’s always wise to use limit orders when buying or selling.

💸 The Tax Advantage: An Often-Overlooked Edge

Another reason preferred shares can be attractive relative to CDs comes down to taxes.

Interest from CDs is taxed as ordinary income, which can be as high as 37%. In contrast, dividends from many bank preferreds are often treated as qualified dividends, which are taxed at lower rates (typically 15–20%), though this should be confirmed for each specific issue.

The result? A 6–6.5% preferred yield can, in some cases, translate into higher after-tax income than a higher nominal CD rate.

📅The "Cutoff Clock”

The Ex-Dividend Date is the "cutoff" that determines who receives the next dividend check.

If you see a preferred stock you like trading near its ex-date, decide if you’d rather have the immediate cash (buy before) or a better yield by snagging shares at a lower price (buy after).

🧠 The Insight Edge: Why This Opportunity Exists

What’s creating this opportunity today is the market’s current fixation on uncertainty.

With interest rates elevated and macro risks still in focus, many investors have shifted toward short-term instruments like CDs and money market funds, prioritizing simplicity and perceived safety. In that process, parts of the preferred market—especially bank-issued securities—have been somewhat overlooked.

At the same time, higher rates have pushed preferred prices below their $25 par value, even for fundamentally strong institutions like Goldman Sachs and Capital One. This has created a rare combination: relatively solid income, discounted prices, and potential upside.

What could change this? A decline in interest rates or a shift in investor sentiment back toward longer-duration income assets could gradually pull these securities closer to par. On the other hand, if rates stay higher for longer, floating-rate structures continue to benefit, helping sustain income.

In other words, you’re being compensated today for uncertainty—while retaining multiple ways to win depending on how the environment evolves.

I hope you found this Byte useful. As always, keep reading, keep learning, and keep investing thoughtfully.

In a market full of noise, the real edge lies in finding investments that bring income, stability, and peace of mind.

See you next week,

Pooja