When Does It Make Sense to Invest in Preferred Stocks?
Like bonds, preferreds can help investors preserve capital and generate steady income. For those nearing retirement or transitioning to a lower salary, their reliable income payments can provide stability while still allowing for some capital appreciation.
While bonds and dividend-paying stocks can also offer these benefits, preferreds often combine the best of both worlds — the income of a bond with the upside potential of a stock.
As of March 31, 2025, the median yield of preferred stocks (per Fidelity’s Preferred Security Screener) stood at around 6%. You can find preferreds issued by investment-grade U.S. utilities, master limited partnerships (MLPs) that operate pipelines, and large U.S. banks.
For most investors, cumulative preferreds from investment-grade issuers strike a solid balance between CD-like safety and equity-like yield, especially when purchased close to par value.
Preferred stocks — particularly cumulative, investment-grade issues — offer:
Attractive yields
Priority on dividends
Potential for capital gains if bought near par
And in a lower interest rate environment, preferreds tend to shine even brighter. Their fixed dividends become more appealing relative to other fixed-income options, often leading to price appreciation as investors search for stable, higher-yielding income sources.
My Take
Personally, I prefer owning individual preferred stocks of large banks and utilities for their higher yields and potential appreciation — rather than ETFs like PFFD (Global X U.S. Preferred ETF), which typically offer lower yields and come with fund fees.
Here are a few preferreds I currently hold and have been very satisfied with:
Bank of Hawaii Corp PFD 8.00% (BOHPRB)
U.S. Bancorp Del Dep Perp PFD K 5.50% (USBPRP)
Duke Energy Corp New DP Rep PFD A 5.75% (DUKPRA)
I usually use Kiplinger’s Investment for Income magazine or the Fidelity Preferred Screener to identify these opportunities — though many trading platforms offer similar tools.
Key Features of Recent Preferred Stocks
Cumulative Dividends: Most new issues from investment-grade issuers have cumulative dividends — meaning any skipped payments must be made up before common shareholders receive anything.
Fixed or Floating Dividend Rates: Many start with a fixed rate (often above 7% for solid issuers), later switching to a floating rate.
Callable Feature: Most preferreds can be redeemed by the company at par (typically $25) after a call protection period (often 5 years). Some even include a small call premium.
Perpetual or Long Maturity: Many are perpetual (no maturity), though some “baby bonds” mature in 30+ years.
Credit Quality: Investment-grade preferreds (BBB/Baa3 or higher) cater to investors prioritizing capital preservation with modest default risk.
Ranking: Preferreds rank above common stock but below bonds for dividends and liquidation priority.
Convertibility: Some issues allow conversion into common stock at a set ratio, though this is less common among investment-grade offerings.
As always, my goal is to keep sharing practical investing ideas and insights that help you grow and protect your wealth.
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Happy Diwali (Victory of knowledge over ignorance)!
Your Friend in Investing,
Pooja
