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Preferred Stocks: The Hybrid Investment Many Miss

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  Published in Stocks and Investing on Wednesday, December 24th 2025 at 12:50 GMT by Forbes

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A Guide to Preferred Stocks – The Hybrid Investment Many Investors Miss

In a market that’s still navigating the aftermath of a multi‑year low‑rate environment, investors are looking for alternatives that combine the upside of equity with the stability of fixed income. That’s where preferred stocks come in. In a recent Forbes article, Kenneth Winans dives into the mechanics, merits, and pitfalls of preferred stocks, offering a concise playbook for both newcomers and seasoned portfolio builders.

What Are Preferred Stocks?

At their core, preferred stocks are a hybrid security that sits between common equity and debt. They’re issued by corporations—often utilities, banks, and real estate investment trusts (REITs)—and carry a fixed dividend that must be paid before any dividends can be issued to common shareholders. If a company defaults, preferred shareholders are also paid before common equity holders, but after bondholders.

The Forbes article outlines the three pillars that make preferreds unique:

1. Fixed Income‑Like Yield – Most preferreds come with a stated dividend, often ranging from 4% to 8% in a 2025 market that still sees yields higher than those of many U.S. Treasury bonds.
2. Equity‑Like Capital Appreciation – While their prices don’t swing as wildly as common stocks, they still have upside potential, especially when a company’s earnings grow or when market rates fall.
3. Priority Claim – Preferreds enjoy a higher claim on a company’s cash flows than common shares, but they are still subject to credit risk.

Winans stresses that the “hybrid” label can be misleading. Preferreds are neither pure bonds nor pure stocks, and they come in many flavors that can tilt the balance one way or another.

Types of Preferreds – From Vanilla to Convertible

The article walks readers through the common varieties:

Preferreds that are convertible can offer a “sweet spot” for investors who want both income and a potential upside if the company’s common shares rise. The article cites examples such as AT&T’s Class A Preferred and a number of high‑yield convertible preferreds issued by regional banks.

Why Investors Often Miss Preferreds

One of the key take‑aways from the Forbes guide is that preferreds sit in a gray area: they’re not part of the typical “stock” or “bond” conversations. Many investors simply ignore them for a few reasons:

• Limited Visibility – Preferreds are less actively traded than common shares, so many retail platforms don’t prominently display them.
• Lack of Familiarity – Many investors have a mental model that equates “stocks” with common equity and “bonds” with fixed‑income instruments.
• Tax Complexity – Unlike interest from bonds, dividends from preferreds are treated as ordinary income, which can reduce the after‑tax return.

The article urges investors to look beyond the label and examine the underlying features of each preferred.

How to Evaluate a Preferred Stock

Winans provides a “decision checklist” that investors can use to assess whether a preferred fits their goals:

1. Yield vs. Spread – Compare the dividend yield to the yield spread over Treasuries and corporate bonds of similar credit quality.
2. Duration – Preferreds have a duration that’s generally shorter than bonds but longer than common stocks. This measures interest‑rate sensitivity.
3. Credit Rating – Look at Moody’s or S&P ratings; many high‑yield preferreds are “B” or “BB” rated.
4. Call Risk – If a preferred is callable, the price will cap at the call price. Determine if you’re comfortable with this ceiling.
5. Dividend Frequency – Quarterly vs. semi‑annual can affect cash flow planning.
6. Tax Implications – Factor in the ordinary‑income tax bracket versus the capital‑gain tax rate.

The article also suggests using the Preferred Yield formula:

[ \text{Preferred Yield} = \frac{\text{Annual Dividend}}{\text{Current Market Price}} ]

But note that the price can change with credit spreads and interest rates.

Investing in Preferreds – Direct or via ETFs

While many investors can buy individual preferreds through a brokerage, the article notes that the most straightforward way to gain diversified exposure is through ETFs. Some of the highlighted funds include:

• iShares Preferred and Income Securities ETF (PFF) – Holds a mix of high‑yield, callable preferreds.
• SPDR Portfolio Preferred Stock ETF (SPDW) – Focuses on high‑quality, less‑volatile preferreds.
• Invesco Preferred ETF (PGX) – Offers a blend of investment‑grade and high‑yield securities.

Using an ETF simplifies the process because the fund’s manager handles the call and conversion mechanics. It also allows investors to benefit from dollar‑cost averaging and lower transaction costs.

Tax Treatment – A Quick Recap

Winans spends a paragraph on the tax differences that can surprise investors:

• Dividends – Preferred dividends are taxed at the ordinary‑income rate (15% or 20% federal, plus state taxes).
• Capital Gains – If you sell the preferred at a price higher than you paid, the gain may be taxed at the long‑term capital‑gain rate (0%, 15%, or 20%).
• Municipal Preferreds – Some preferreds issued by municipalities are exempt from federal income tax and, in certain cases, state tax.

Because preferreds are not “qualified dividends” (they’re not treated as such for tax purposes), they do not benefit from the lower qualified dividend tax rate. This is a key consideration when comparing them to high‑yield bonds or common equity.

Bottom Line – Is a Preferred Right for You?

In the Forbes article’s conclusion, Winans doesn’t provide a one‑size‑fits‑all answer. Instead, he outlines a framework that matches a preferred’s characteristics to an investor’s objectives:

• Seeking higher yield than bonds but lower volatility than common stocks? Look for a high‑quality, callable preferred with a decent credit rating.
• Looking for a hedge against a rising‑rate environment? Choose a short‑duration preferred, or a non‑callable, fixed‑rate preferred.
• Wanting an income vehicle that’s less tax‑efficient than bonds? Be prepared to pay ordinary‑income tax on dividends, but you’ll also get the priority claim that can protect against default.

Ultimately, the article urges investors to think of preferred stocks as a “missed link” in the income‑seeking spectrum. By adding them to a portfolio, you can boost the overall yield while maintaining a level of risk that’s typically lower than owning a large portion of common equity.

Where to Learn More

Winans links to several resources for deeper dives:

• Morningstar Preferred Stock Analyst Reports – Comprehensive credit analysis.
• S&P Global Ratings – Preferred Stock Overview – Understand rating methodology.
• IRS Publication 550 – Taxation of investment income.
• Bogleheads Forum – Preferred Stock Discussions – Community insights.

These links provide the context and data that can help an investor evaluate a specific preferred stock beyond the quick guide.

In a nutshell, preferred stocks offer a nuanced blend of income and upside that can help investors navigate a complex market environment. By paying attention to yield, credit, duration, and tax implications—while staying aware of the hybrid nature of the asset—you can make an informed decision about whether a preferred is the right addition to your portfolio.