Do Preferred Stocks Pay Dividends? How Preferred Income Works

Yes, preferred stocks pay dividends — and that is their primary purpose. Preferred stock is a hybrid security that sits between bonds and common stock in a company's capital structure. Like bonds, preferred stocks pay a fixed income stream. Like stocks, they represent equity ownership and trade on exchanges. For income investors, preferred stocks offer yields that are typically much higher than common stock dividends and often higher than investment-grade bonds.

The "preferred" in preferred stock refers to dividend priority. If a company faces financial difficulty and must reduce or suspend dividends, it must cut the common stock dividend first. Preferred shareholders continue receiving their fixed payments as long as the company has sufficient funds. Only if the company's situation deteriorates further would preferred dividends be at risk.

How Preferred Stock Dividends Work

Preferred stock dividends are typically set at a fixed rate when the shares are issued. For example, a preferred stock with a $25 par value and a 6% coupon rate would pay $1.50 per year in dividends, usually in quarterly installments of $0.375. This rate does not change regardless of the company's profitability or growth — unlike common stock dividends, which can be increased or decreased.

Most preferred stocks pay dividends quarterly, though some pay monthly or semi-annually. The payment schedule and amount are specified in the stock's prospectus and remain constant throughout the life of the security.

The most common types of preferred stock include:

• Cumulative preferred — If the company misses a dividend payment, it must make up all missed payments before resuming common stock dividends. This is the most common and investor-friendly type
• Non-cumulative preferred — Missed dividends are gone forever and do not accrue. Less common but occasionally issued by banks and financial companies
• Convertible preferred — Can be converted into a specified number of common shares, giving holders some upside potential if the common stock appreciates
• Callable preferred — The issuing company can redeem the shares at a specified price after a certain date, which limits upside and creates reinvestment risk

Preferred Stock Yields vs. Other Income Investments

Preferred stocks generally offer yields that fall between common stocks and high-yield bonds:

• S&P 500 common stocks — approximately 1.2-1.5% average yield
• Preferred stocks — approximately 4-7% yield
• Investment-grade corporate bonds — approximately 4-5.5% yield
• High-yield corporate bonds — approximately 6-8% yield

The higher yield of preferred stocks compared to common stocks compensates investors for giving up growth potential. Preferred share prices rarely appreciate significantly because their value is primarily driven by the fixed dividend stream and prevailing interest rates, not company earnings growth.

Tax Treatment of Preferred Dividends

Many preferred stock dividends qualify for the qualified dividend tax rate (0%, 15%, or 20%), which is lower than the ordinary income rate applied to bond interest. This gives preferred stocks a tax advantage over bonds for investors in taxable accounts. However, not all preferred dividends are qualified — preferred stocks issued by REITs and certain financial institutions may pay non-qualified dividends taxed at ordinary income rates.

To determine the tax treatment, check the issuer's annual tax classification of distributions. Your brokerage will report this on Form 1099-DIV, separating qualified and ordinary dividends.

Risks of Preferred Stock Investing

Preferred stocks are not without risk. The most significant risks include:

• Interest rate risk — When interest rates rise, preferred stock prices fall, since investors can find comparable yields in newer, higher-paying securities. This can lead to significant paper losses even while dividends continue
• Call risk — Most preferred stocks are callable after five years. If rates drop, the company may redeem your shares and you will need to reinvest at lower yields
• Credit risk — If the issuing company's financial health deteriorates, preferred dividends may be suspended. During the 2008 financial crisis, several banks suspended preferred dividends
• Limited upside — Unlike common stock, preferred shares rarely appreciate beyond their par value. Your return is almost entirely from the dividend

Preferred Stock ETFs for Diversification

Individual preferred stocks can be illiquid and difficult to research. Many income investors prefer to access the asset class through preferred stock ETFs, which offer diversification and professional management. Popular options include the iShares Preferred and Income Securities ETF (PFF), the First Trust Preferred Securities and Income ETF (FPE), and the Invesco Preferred ETF (PGX). These funds typically yield between 5% and 7% and hold hundreds of preferred issues across multiple sectors.

Preferred stock ETFs reduce the risk of any single issuer suspending dividends, making them a more practical way for most investors to add preferred stock income to their portfolios. For a broader view of income-generating funds, explore our high-yield ETF list.