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Preferred Bank Stocks: The Investment Retirees (and Others) May Be Missing Out On

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  Published in Stocks and Investing on Wednesday, October 8th 2025 at 6:28 GMT by Kiplinger
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Bank Preferred Shares: The Quiet Income Goldmine for Retirees

Retirees have long known that the quest for a reliable stream of income is paramount, and the most common answer is “dividend‑paying stocks or bonds.” Yet, as a recent Kiplinger piece points out, a surprisingly low‑profile asset class may be offering retirees a sweet spot between the security of bonds and the upside potential of stocks: bank preferred shares.

Below is a distilled, practical overview of what preferred shares are, why banks issue them, and how retirees can add them to their portfolios without over‑exposing themselves to risk.

1. What Are Preferred Shares?

Preferred shares sit between common stocks and bonds in the capital‑structure hierarchy. They are:

Key take‑away: Preferred shares are part‑stock, part‑bond instruments that pay a fixed dividend (like a bond coupon) and rank higher than common shares in case a bank faces distress.

2. Why Banks Issue Preferred Shares

Banks use preferred shares to raise capital without diluting the voting power of common shareholders. This hybrid instrument helps banks meet regulatory capital requirements—namely the Tier 1 capital ratio—while providing investors with a dependable dividend stream. For banks, preferred shares are cheaper than common equity, and for investors, they are cheaper than bonds.

Kiplinger’s article links to a companion “Preferred Stock” guide that explains that the primary differences among preferreds are:

• Cumulative vs. Non‑cumulative – Cumulative preferreds accrue unpaid dividends; non‑cumulative may skip them.
• Convertible vs. Non‑convertible – Convertible preferreds can be swapped for common stock at a predetermined ratio.
• Callable – Many bank preferreds can be called when rates rise or capital needs shift.

3. The Appeal to Retirees

1. Yield Superiority
Bank preferreds typically offer dividend yields in the 4‑6 % range, comfortably higher than high‑grade corporate bonds and comparable to many high‑yield bonds, especially in a low‑interest‑rate environment.

2. Stability
Because dividends are paid before common dividends, they tend to be less volatile than common stocks. Moreover, the fact that banks are heavily regulated adds a layer of protection; they are less likely to default than non‑bank issuers.

3. Diversification
Preferreds often exhibit low correlation with equities and bonds, providing a cushion during market turbulence. In 2023, when the S&P 500 was under pressure, a portfolio with a 5‑10 % allocation to bank preferreds performed noticeably better than one without.

4. Tax Considerations
Dividend income from preferreds is taxed as ordinary income, which is the same tax treatment as bonds’ interest. For many retirees on a fixed tax bracket, this is advantageous because it offers a straightforward, predictable income stream.

4. The Risks You Must Monitor

1. Interest‑Rate Sensitivity
Preferred shares are priced like bonds; when rates climb, the price of existing preferred shares drops. The “call” feature magnifies this effect: banks can redeem the shares when rates drop, forcing investors to reinvest at lower yields.

2. Credit Risk
Even though banks are regulated, their credit quality can deteriorate, especially during economic downturns. In 2008, some bank preferreds plummeted because banks faced massive losses.

3. Concentration
A portfolio that is too heavily weighted in a single bank’s preferred stock can expose an investor to a company‑specific event. Diversifying across multiple banks or a preferred‑stock ETF mitigates this risk.

4. Liquidity
While major banks’ preferreds trade fairly well, smaller or niche issuers may have thin trading volumes, making it harder to enter or exit positions at favorable prices.

5. How to Get Started

Direct Purchase
Retirees can buy preferred shares through a brokerage account. Kiplinger recommends looking at the preferred stock of banks with strong credit ratings, such as JPMorgan Chase (JPM PR), Goldman Sachs (GS PR), or Bank of America (BAC PR). Be sure to read the prospectus for call dates and dividend schedules.

Preferred‑Stock ETFs
For those who prefer a hands‑off approach, the market offers a handful of ETFs that focus on preferred shares. The most popular include:

• VanEck Vectors Preferred Stock ETF (PFF) – Tracks an index of U.S. preferred stocks.
• iShares Preferred and Income Securities ETF (PFF) – Provides diversified exposure with a slightly different weighting scheme.

These funds typically have expense ratios in the 0.3‑0.5 % range and provide instant diversification across dozens of issuers.

Suggested Allocation
Kiplinger suggests an allocation of 5‑10 % of a retirement portfolio to bank preferred shares or a preferred‑stock ETF. This modest slice can boost overall yield while keeping risk manageable.

6. Real‑World Performance Snapshot

A quick look at the performance of bank preferred shares over the past decade:

While past performance is no guarantee of future results, the data suggest that bank preferreds have outperformed pure bond indices in terms of total return, especially during periods of low rates.

7. Bottom Line

Bank preferred shares represent a middle ground that many retirees have been missing: a higher yield than most bonds, less volatility than common stocks, and a stable, predictable income stream. Like all investments, they come with risks—interest‑rate sensitivity, credit risk, and concentration risk—that must be understood and managed.

The Kiplinger article emphasizes that, when incorporated wisely, bank preferred shares can provide a “quiet, reliable source of income” that fits well into a conservative retirement strategy. For retirees looking to fill a yield gap without taking on undue volatility, a small allocation to bank preferred stocks—or a diversified ETF—could be a valuable addition to their portfolio.