Preferred Stock Primer

Summary

Comprehensive guide to preferred stock (preferred shares) investing, covering features, pricing mechanics, and their role in an income-focused portfolio. Preferred shares offer stable, high-yield income with dividend safety priority over common stock.

What Is Preferred Stock?

Corporations issue two types of securities: equity and debt. Preferred stock is equity (ownership) — like common stock — but without voting rights. The key difference: preferred dividends have priority over common stock dividends. A company cannot reduce or suspend preferred dividends while paying common dividends.

Key Features

Price and Yield

Issued at $25.00 par price with a set coupon rate. Example: Rithm Capital Preferred Series D (RITM.PD) has a 7.0% coupon. 7.0% × $25 par = $1.75/year = $0.4375/quarter.

Callable

The issuer can redeem shares at $25 par value. New issues have call protection until a set date (RITM.PD callable after Nov 15, 2026). Most preferreds are callable but many trade years past their call date without being redeemed.

Fixed to Floating

A preferred may convert from fixed rate to floating (e.g., SOFR + spread) at a future date. RITM.PA converted to floating on August 15, 2024 (SOFR + 5.640%). Conversion coincides with becoming callable.

Cumulative

If dividends are suspended, missed preferred dividends accumulate. The company must make up all skipped payments before restarting common dividends. This is a major safety feature.

Convertible

Can be exchanged for common stock at a fixed ratio, at the owner's discretion.

How Preferred Stocks Trade

Most preferreds trade near $25 par, with yields close to coupon rates. Prices fluctuate with market interest rate changes. Example: RITM.PA traded $25-$27 before the pandemic. When rates rose, many preferreds moved from premium to discount pricing.

Role in an Income Portfolio

Safety: Preferred dividends are the most stable income stream in the DH portfolio. They're fixed — they won't increase or decrease. This stability makes them ideal for investors in or approaching retirement.

DH portfolio approach: Individual preferreds have been removed from the DH recommendations over the last year. The portfolio now includes only Virtus InfraCap U.S. Preferred Stock ETF (PFFA) as the preferred stock exposure. Understanding individual preferred mechanics helps you understand what PFFA holds.

Trading note: Ticker symbols vary by broker — consult the DH guide before purchasing.

Why Hold Preferreds

• Stable, predictable income
• Dividend safety (priority over common)
• No voting rights (management doesn't matter for income)
• Cumulative feature (missed dividends must be repaid)
• Ideal for retirement-stage income cushion

Why Not Hold Preferreds

• No dividend growth (fixed coupon)
• Call risk (issuer redeems at $25)
• Price volatility with interest rates
• Lower upside vs common stock/ETFs