Steadier income with less risk than common stocks? That’s the promise of preferred shares.
Retirees looking for dependable income often turn to familiar investments—dividend-paying stocks, bonds, CDs, and REITs. But there’s another income-generating asset that deserves a spot in your retirement portfolio: preferred stocks.
They’re not as widely known, but they offer an attractive blend of high income and greater security—two things retirees value most.
What Are Preferred Stocks?
Preferred stocks (or “preferreds”) are a hybrid between common stocks and bonds. They typically pay fixed dividends, like a bond pays interest, and are less volatile than common stocks.
But here’s the key advantage: preferreds sit higher in the capital structure than common stock. That means in the event of a company’s financial trouble, preferred shareholders get paid before common shareholders—but afterbondholders.
This makes preferreds more secure than common stock, while still offering more income potential than traditional bonds.
Why Retirees Should Consider Preferreds
Preferreds offer several compelling benefits for income-focused investors:
- Higher yields – Preferreds often yield 5% to 7% or more, compared to 2%–4% for most blue-chip dividend stocks.
- Regular income – Most preferreds pay quarterly dividends, providing a steady cash flow for retirees.
- Lower volatility – Because they don’t fluctuate as much as common stocks, preferreds can help smooth out a portfolio’s ups and downs.
- Better protection – In the event of bankruptcy or restructuring, preferred shareholders have priority over common stockholders.
When Preferreds Shine
Preferreds do particularly well in low interest rate environments or during periods of moderate economic growth, when companies are stable but not booming.
Many preferreds are issued by banks, insurers, and utilities—sectors that tend to be relatively conservative and income-focused. That makes them a good complement to bonds and dividend stocks in a retiree’s portfolio.
How to Invest in Preferreds
There are several ways to add preferreds to your income mix:
- Individual Preferred Stocks – These are traded like regular stocks and are often issued by large, stable companies. You’ll need to research their terms, credit quality, and call dates.
- Preferred ETFs – For simplicity and instant diversification, preferred stock ETFs like PFF (iShares Preferred & Income Securities ETF) or PGX (Invesco Preferred ETF) are popular choices. They typically yield 5%–6% and spread your risk across dozens or hundreds of issues.
- Preferred Closed-End Funds (CEFs) – These may offer even higher yields (7%–8%) and are actively managed, but they may also use leverage and trade at premiums or discounts.
A Word About Risks
No investment is perfect. Preferreds do carry a few risks:
- Interest rate sensitivity – Like bonds, preferreds can lose value when rates rise.
- Call risk – Many preferreds are callable, meaning the issuer can redeem them early—usually when it’s least favorable to you.
- Credit risk – If the issuing company runs into trouble, dividends could be suspended, though this is rare for investment-grade issues.
That’s why preferreds should be one part of a diversified income portfolio, not your only source of yield.
Final Thoughts
Preferred stocks offer a sweet spot for retirees: more stable than common stocks, higher yielding than bonds, and often overlooked by average investors.
For those seeking reliable, long-term income with less drama, preferreds deserve a closer look. They may not be flashy—but in retirement, steady and dependable often wins the race.
Disclaimer: This post is for informational purposes only and is not investment advice. All investments carry risk, including the risk of loss. Preferred stocks may be sensitive to interest rates and credit events. Always consult a licensed financial advisor before making investment decisions.