Types of Preferred Stocks (Preference Shares) Explained – A Guide for U.S. Investors
Preferred stocks, also known as preference shares, are a hybrid investment that combines features of both stocks and bonds. They offer investors fixed dividend payments, priority over common shareholders, and sometimes even the option to convert into common shares.
For U.S. investors, preferred stocks can be an excellent choice for generating stable income while reducing portfolio risk. However, it’s essential to understand the different types of preferred stocks, their benefits, and potential risks before investing.
In this article, we’ll cover the types of preferred stocks available in the U.S., their tax implications, and real-world examples from major American companies.
What Are Preferred Stocks?
Preferred stocks are a class of equity that gives shareholders priority over common stockholders in receiving dividends and liquidation payouts. Unlike common stocks, preferred stocks usually:
✅ Pay fixed dividends (like bonds)
✅ Have higher claims on assets in case of bankruptcy
✅ May be convertible into common shares
❌ Do not have voting rights (in most cases)
Preferred stocks are widely used by income-focused investors who want regular dividend payments without the volatility of common stocks.
Types of Preferred Stocks in the U.S.
1. Cumulative Preferred Stocks
Cumulative preferred stocks protect investors by ensuring that any missed dividend payments accumulate and must be paid before common shareholders receive dividends.
Example:
- If a company skips a $2 dividend per share for two years, it must pay $6 per share (3 years x $2) before common shareholders receive any dividends.
Best For:
- Investors seeking consistent income and lower risk.
✅ Example from the U.S. Market:
- Bank of America (NYSE: BAC.PRK) issues cumulative preferred stocks with fixed dividend payouts.
2. Non-Cumulative Preferred Stocks
Non-cumulative preferred stocks do not accumulate unpaid dividends. If a company does not declare dividends in a particular year, shareholders lose that dividend permanently.
Best For:
- Investors who prioritize higher yields over guaranteed payments.
❌ Example:
- Many financial institutions issue non-cumulative preferred stocks, including JPMorgan Chase (NYSE: JPM.PRD).
3. Participating Preferred Stocks
Participating preferred stocks allow investors to receive additional profit-based dividends if the company performs well.
Key Features:
- Receive fixed dividends first.
- If company profits exceed a threshold, they receive extra dividends.
✅ Best For:
- Investors who want both fixed income and upside potential.
🚀 Example:
- Ford Motor Company (NYSE: F.PR.A) offers participating preferred shares with extra payouts in strong financial years.
4. Non-Participating Preferred Stocks
Non-participating preferred stocks only provide fixed dividends and do not share in extra company profits.
Best For:
- Investors who prefer predictable and stable returns.
5. Convertible Preferred Stocks
Convertible preferred stocks allow investors to convert their preferred shares into common stocks after a set period.
Key Features:
- Converts into common shares at a pre-determined rate.
- Provides the security of fixed dividends with the potential for capital appreciation.
✅ Best For:
- Investors who want steady income now and growth potential later.
🚀 Example:
- Tesla (NASDAQ: TSLA) has issued convertible preferred stocks in the past, allowing investors to convert them into common shares.
6. Non-Convertible Preferred Stocks
Non-convertible preferred stocks cannot be exchanged for common shares, making them ideal for income-focused investors.
7. Redeemable (Callable) Preferred Stocks
Redeemable preferred stocks, also called callable preferred stocks, allow the issuing company to buy back shares at a pre-set price after a certain period.
Best For:
- Investors who want higher dividend yields in exchange for potential early redemption.
🚀 Example:
- Goldman Sachs (NYSE: GS.PRA) issues redeemable preferred stocks that the company can repurchase.
8. Perpetual Preferred Stocks
Perpetual preferred stocks have no maturity date, meaning they pay dividends indefinitely unless the company redeems them.
🚀 Example:
- Wells Fargo (NYSE: WFC.PR.L) has issued perpetual preferred stocks with long-term payouts.
9. Adjustable-Rate Preferred Stocks (ARPS)
Adjustable-rate preferred stocks (ARPS) have dividend payments that fluctuate based on interest rates (such as LIBOR or SOFR).
✅ Best For:
- Investors who want protection against inflation.
🚀 Example:
- Morgan Stanley (NYSE: MS.PR.A) issues ARPS that adjust based on U.S. interest rate changes.
Tax Treatment of Preferred Stocks in the U.S.
Preferred stocks in the U.S. are taxed differently than common stocks and bonds.
🔹 Qualified Dividends: Most preferred stock dividends in the U.S. are classified as qualified dividends, which are taxed at lower capital gains rates (0%, 15%, or 20%).
🔹 Ordinary Income: Some preferred stocks, especially those issued by REITs or partnerships, may be taxed as ordinary income (up to 37%).
🔹 Tax-Advantaged Accounts: Holding preferred stocks in IRAs or 401(k) accounts can help defer or eliminate taxes on dividends.
Pros and Cons of Investing in U.S. Preferred Stocks
✅ Pros:
✔️ Higher dividend yields than common stocks
✔️ Lower volatility than common stocks
✔️ Priority over common shareholders in payouts
✔️ Tax advantages on qualified dividends
❌ Cons:
❌ Limited growth potential compared to common stocks
❌ Interest rate risk (rising rates can reduce preferred stock values)
❌ Callable risk (companies can buy back shares, limiting returns)
❌ No voting rights in most cases
Conclusion: Should You Invest in Preferred Stocks?
Preferred stocks can be a great addition to an income-focused portfolio, offering higher yields than bonds with lower volatility than common stocks.
📌 Best for:
✅ Retirees and income investors
✅ Those looking for tax-advantaged dividends
✅ Investors seeking diversification
📌 Not ideal for:
❌ Growth-focused investors
❌ Investors wanting voting rights
To maximize returns, investors should compare dividend yields, tax treatments, and redemption features before buying preferred stocks.
1. What are preferred stocks?
Preferred stocks (preference shares) are a type of equity that provides shareholders with fixed dividend payments and priority over common shareholders in dividends and liquidation, but they typically do not have voting rights.
2. How do preferred stocks differ from common stocks?
| Feature | Preferred Stocks | Common Stocks |
| Dividends | Fixed, paid first | Variable, paid last |
| Voting Rights | Usually no | Yes |
| Risk Level | Lower | Higher |
| Growth Potential | Limited | Higher |
| Liquidation Priority | Before common stocks | Last in line |
3. What are cumulative preferred stocks?
Cumulative preferred stocks ensure that if a company misses a dividend payment, the unpaid dividends accumulate and must be paid before common shareholders receive any dividends.
4. What happens if I own non-cumulative preferred stocks and the company skips dividends?
Non-cumulative preferred shareholders lose the dividend permanently if the company does not declare a dividend in a given year.
5. What are participating preferred stocks?
Participating preferred stocks allow investors to receive additional profit-based dividends beyond the fixed rate if the company earns excess profits.
6. Can I convert preferred stocks into common stocks?
Yes, convertible preferred stocks can be exchanged for common stocks at a pre-set ratio, allowing investors to benefit from price appreciation. Non-convertible preferred stocks cannot be converted.
7. What are callable (redeemable) preferred stocks?
Callable preferred stocks allow the issuing company to buy back shares at a pre-determined price after a certain date. This poses a risk to investors if shares are called when interest rates decline.
8. What are perpetual preferred stocks?
Perpetual preferred stocks have no maturity date and pay dividends indefinitely unless the company redeems them.
9. What are adjustable-rate preferred stocks (ARPS)?
Adjustable-rate preferred stocks have dividends tied to a benchmark interest rate (e.g., SOFR), meaning dividend payments fluctuate based on market rates.
10. Do preferred stockholders get voting rights?
In most cases, preferred stockholders do not have voting rights, but some companies issue preferred shares with limited voting power.
11. Are preferred stocks safer than common stocks?
Yes, preferred stocks are generally less volatile and offer more predictable income, but they still carry risks like interest rate sensitivity and callable risk.
12. Are dividends from preferred stocks taxed in the U.S.?
- Qualified dividends (from most U.S. corporations) are taxed at lower capital gains rates (0%, 15%, or 20%).
- Non-qualified dividends (from REITs, MLPs, and certain financial institutions) are taxed as ordinary income (up to 37%).
- Holding preferred stocks in IRAs or 401(k)s can help defer taxes.
13. Are preferred stocks better than bonds?
| Feature | Preferred Stocks | Bonds |
| Dividends/Interest | Fixed but can be skipped | Fixed and must be paid |
| Priority in Liquidation | Lower than bonds | Higher |
| Tax Treatment | May qualify for lower tax rates | Interest is taxed as ordinary income |
| Interest Rate Sensitivity | High | High |
Preferred stocks offer higher yields than bonds, but bondholders have a stronger claim in bankruptcy.
14. How can I buy preferred stocks in the U.S.?
- Stock Exchanges (NYSE, NASDAQ) – Many preferred stocks trade like regular stocks.
- Brokerage Accounts (Fidelity, TD Ameritrade, Charles Schwab) – Investors can buy individual preferred stocks.
- ETFs & Mutual Funds – Funds like the iShares Preferred & Income Securities ETF (PFF) provide diversification.
15. Are preferred stocks good for retirement accounts (IRAs, 401(k)s)?
Yes! Preferred stocks can generate stable, tax-efficient income, making them a good choice for retirement portfolios.
16. Can I lose money investing in preferred stocks?
Yes, preferred stocks are not risk-free. Risks include:
❌ Company default – If the company goes bankrupt, preferred shareholders may lose their investment.
❌ Callable risk – The company may redeem shares at a lower price than market value.
❌ Interest rate risk – Rising rates can decrease preferred stock values.
17. What are the best U.S. companies offering preferred stocks?
Some well-known companies issuing preferred stocks include:
- Bank of America (BAC.PRK) – Cumulative preferred shares
- JPMorgan Chase (JPM.PRD) – Non-cumulative preferred shares
- Goldman Sachs (GS.PRA) – Redeemable preferred shares
- Wells Fargo (WFC.PR.L) – Perpetual preferred shares
18. Can preferred stocks be included in an income strategy?
Yes! Preferred stocks can be part of an income-focused portfolio, alongside bonds, dividend stocks, and REITs.
19. Are preferred stocks suitable for short-term traders?
Not usually. Preferred stocks are best for long-term investors seeking stable income, rather than short-term capital gains.
20. What should I consider before investing in preferred stocks?
✔ Dividend history – Does the company pay consistent dividends?
✔ Call provisions – Can the company redeem shares early?
✔ Cumulative vs. non-cumulative – Will you receive unpaid dividends?
✔ Interest rate environment – Rising rates can lower preferred stock prices.
✔ Tax treatment – Are dividends qualified or ordinary income?
Disclaimer: The information provided in this article is for informational and educational purposes only and should not be considered financial, investment, or professional advice. While we strive for accuracy, we do not guarantee the completeness or reliability of the content. Always conduct your own research or consult a qualified financial advisor before making any investment decisions. MarketUnder.com and its authors are not responsible for any financial losses or decisions made based on this information.
