Preferred Stocks: The Ultimate Guide to Preferred Shares in 2025

Discover everything about preferred stocks in this expert guide. Learn how to invest, compare with bonds, find top ETFs, and explore alternatives.

Table of Contents

1. What Are Preferred Stocks?

2. Key Features of Preferred Stocks

3. Types of Preferred Stocks

4. Advantages of Preferred Stocks

5. Risks and Disadvantages

6. Preferred Stocks vs Common Stocks

7. Preferred Stocks vs Bonds

8. How to Value Preferred Stocks

9. 2025 Market Trends & Pricing

10. Taxation of Preferred Shares

11. Best Alternatives to Preferred Stocks

12. Top Preferred Stock ETFs to Watch

13. How to Invest in Preferred Stocks

14. Ideal Investors for Preferred Stocks

15. 20 Frequently Asked Questions (FAQs)

16. Conclusion

What Are Preferred Stocks?

Preferred stocks (or preference shares) are a hybrid financial instrument combining the income reliability of bonds with some features of common stock. They pay fixed dividends and receive priority in dividend distribution and liquidation—but usually lack voting rights.

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Key Features of Preferred Stocks

• Fixed Dividends: Guaranteed payouts, similar to bond coupons

• Dividend Priority: Paid before common shareholders

• No Voting Rights: Generally no say in corporate governance

• Callable: Company can redeem at a pre-set price

• Convertible (Optional): Some can be converted into common shares

• Perpetual or Term: Some have no maturity date; others expire

Types of Preferred Stocks

1. Cumulative Preferred: Unpaid dividends roll forward

2. Non-Cumulative Preferred: Skipped dividends don’t accumulate

3. Participating Preferred: Earn extra based on profits

4. Convertible Preferred: Option to convert to common stock

5. Callable Preferred: Redeemable by issuer

6. Perpetual Preferred: Pays dividends indefinitely

7. Adjustable-Rate Preferred: Dividends vary with interest rates

🔗 See examples on Nasdaq Preferred Stock Listings

Advantages of Preferred Stocks

• 📈 Reliable Income: Great for income-focused investors

• 🛡️ Lower Risk: Less volatile than common stocks

• 🥇 Dividend Priority: Paid before common stockholders

• 🔁 Convertibility: Option to switch to common stock

• 💸 Tax-Efficient (in the U.S.): Qualified dividends may get lower tax rates

Risks and Disadvantages

• 💥 Interest Rate Sensitivity: Price drops when rates rise

• 🔇 No Voting Rights: Less say in corporate decisions

• 💹 Lower Capital Gain Potential: Limited upside compared to common shares

• 🧲 Callable Risk: Company may redeem at disadvantageous times

• 🪙 Dividend Not Guaranteed: Especially for non-cumulative types

✅ Preferred Stocks vs Common Stocks

• ✓ Dividend

  • Preferred Stock: Fixed & prioritized

  • Common Stock: Variable & last priority

• ✓ Voting Rights

  • Preferred Stock: Usually none

  • Common Stock: Full voting rights

• ✓ Risk

  • Preferred Stock: Lower

  • Common Stock: Higher

• ✓ Growth Potential

  • Preferred Stock: Limited

  • Common Stock: High

• ✓ Price Volatility

  • Preferred Stock: Lower

  • Common Stock: Higher

✅ Preferred Stocks vs Bonds

• ✓ Ownership Type

  • Preferred Stock: Equity

  • Bonds: Debt

• ✓ Payout Type

  • Preferred Stock: Dividends

  • Bonds: Interest

• ✓ Tax Advantage

  • Preferred Stock: Often tax-favored

  • Bonds: Usually fully taxable

• ✓ Maturity

  • Preferred Stock: May not mature

  • Bonds: Fixed maturity

• ✓ Liquidation Order

  • Preferred Stock: After bonds

  • Bonds: Before stockholders 

How to Value Preferred Stocks?

Use this simple formula:

Price = Dividend / Required Rate of Return

Example:
If annual dividend = $4 and required return = 6%,
then Price = 4 / 0.06 = $66.67 

2025 Market Trends & Pricing

Preferred stocks in 2025 are bouncing back as interest rates stabilize. Investors are locking in 6–8% annual dividends, especially through ETFs like PFF and PGX. However, callable risks and inflation still weigh on valuations.

📊 Check real-time data on Yahoo Finance

Taxation of Preferred Shares

• Qualified Dividends: May be taxed at 0%, 15%, or 20% in the U.S.

• Non-Qualified Dividends: Taxed as ordinary income

• Corporate Investors: May benefit from the Dividends Received Deduction (DRD)

• IRA/401(k) Accounts: Tax deferral advantage

📄 IRS Guide on Dividends

Best Alternatives to Preferred Stocks

1. Dividend Aristocrats ETFs – e.g., NOBL ETF

2. REITs (Real Estate Investment Trusts) – e.g., VNQ

3. Corporate Bonds – For stability and known maturity

4. Municipal Bonds – Tax-free income

5. High-Yield Savings or CDs – Risk-free interest

6. Stable Dividend Stocks – Like JNJ, PEP, PG

Top Preferred Stock ETFs to Watch in 2025

1. 🟢 iShares Preferred and Income Securities ETF (PFF)

   • Largest preferred ETF

   • Website

2. 🟣 Invesco Preferred ETF (PGX)

   • Focuses on investment-grade preferreds

   • Website

3. 🔵 SPDR Wells Fargo Preferred Stock ETF (PSK)

   • Heavier exposure to financials

   • Website

How to Invest in Preferred Stocks?

1. ✅ Open a Brokerage Account: Fidelity, Schwab, or Robinhood

2. 🔍 Screen for Preferred Shares or ETFs

3. 📈 Monitor Performance, Yield, and Callable Terms

4. 💼 Diversify Through ETFs or Mutual Funds

Ideal Investors for Preferred Stocks

Preferred stocks are ideal for:

• 📥 Income Seekers: Retirees or fixed-income investors

• 💼 Conservative Investors: Seeking more stability than equities

• 📊 Diversifiers: Adding balance between growth and fixed income

• Tax-Conscious Investors: Leveraging dividend tax benefits

Frequently Asked Questions (FAQs)

1. Are preferred stocks better than common stocks?

 – Not necessarily. Preferred stocks offer steady income, but less upside.

2. Can you lose money with preferred shares?

– Yes. Prices can drop due to interest rate changes, company performance, or call provisions.

3. What’s the biggest risk with preferred stock?

– Callable risk and interest rate sensitivity.

4. How often do preferred stocks pay dividends?

– Usually quarterly.

5. Do preferred shares always pay dividends?

– No. Especially if they are non-cumulative and the company misses payments.

6. Can I buy preferred stocks on Robinhood?

– Yes, but the selection may be limited.

7. Do preferred stocks appreciate in price?

– They can, but typically much less than common stock.

8. What happens when a preferred stock is called?

– You are paid a pre-defined amount and lose future dividends.

9. Are preferred dividends taxed?

– Yes, often as qualified dividends in the U.S.

10. Do preferred stocks expire?

– Perpetual ones do not. Some have maturity dates.

11. Is preferred stock equity or debt?

– Technically equity, but behaves like debt.

12. Can companies suspend preferred dividends?

– Yes, especially if they're non-cumulative.

13. Where can I research preferred stocks?

– QuantumOnline, FINRA Market Data

14. Are preferred stocks good during inflation?

– Not always, since fixed income loses value.

15. How liquid are preferred shares?

– Less liquid than common stocks or ETFs.

16. Can you sell preferred stocks anytime?

– Yes, if there’s market demand.

17. Do preferred shares outperform bonds?

– Not always. They carry more risk but may offer higher yield.

18. Do mutual funds hold preferred stock?

– Some do. Check fund details before investing.

19. What is the par value of preferred shares?

– Often $25 or $50, used to calculate dividend payouts.

20. Are there preferred stocks outside the U.S.?

– Yes, but they are less common and can vary by country.

Conclusion

Preferred stocks remain a smart tool for income-seeking investors in 2025, especially in a climate of economic uncertainty and volatile equity markets. While they don’t provide the explosive growth potential of common stocks, they offer predictable returns, priority in dividends, and tax efficiency for the right type of investor.

If you’re looking for a middle ground between stocks and bonds, preferred shares may deserve a permanent seat in your portfolio—especially when accessed through ETFs or held in tax-advantaged accounts.