Preferred stocks are a hybrid between bonds and common stocks. They pay fixed dividends (usually higher than common shares), get paid before common shareholders in bankruptcy, but don’t vote and have limited upside when the company grows. Most retail investors have never heard of them โ which creates a potential opportunity.
How Preferred Stocks Work
Par value: typically $25 per share. Dividend: fixed percentage of par value (e.g., 6% of $25 = $1.50/year = $0.375/quarter). Priority: preferred dividends must be paid before common stock dividends. Callable: most preferred shares can be “called” (bought back) by the company at par value, usually after 5 years. No voting rights on company matters.
Current Yields
Investment-grade preferred stocks: 5โ7% yields. Below-investment-grade: 7โ11% yields. Financial sector preferred stocks (banks, insurance): most common and typically safest. Utility preferred stocks: stable cash flows, well-covered dividends. REIT preferred stocks: higher yield, higher risk.
Risks to Understand
Interest rate sensitivity: like bonds, preferred stock prices fall when interest rates rise. Limited upside: you don’t benefit much if the company grows dramatically. Call risk: if rates fall, companies call preferred shares at par and reissue at lower rates โ you lose your high-yield investment. Liquidity: many individual preferred stocks trade thinly.
Comments