What is a preferred stock?

Introduction

Certain corporations in the U.S. have two classes of stock: common stock and preferred stock. A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred stock is still considered to be "equity" in that claims of preferred stockholders are secondary to any claims of creditors.

Preferred shares generally have a dividend that must be paid out before the company can pay any dividends to common shareholders. Preferred shares usually are issued with a fixed, predetermined dividend rate, although sometimes they are issued with a dividend rate that can vary based on a interest rate benchmark such as the 3-month LIBOR.

Preferred shares may or may not come with any voting rights. You have to look carefully at the prospectus to determine what shareholder rights a preferred stock holder has.

Our database currently contains 577 preferred stocks that are traded on U.S. stock exchanges, with a total market capitalization of $194,909,099,773. See our list of preferred stocks. These 577 preferred stocks currently have an average dividend yield of 5.85%.

Preferred stocks are not that common. Most U.S. corporations that are publicly traded on the stock market have only common stock, as shown in this table:

CategoryHas Publicly Traded Preferred StockHas Privately Traded Preferred StockDoesn't Have Preferred StockTotal
0055
Large cap4923454526
Micro cap44871,2961,427
Mid cap6319720802
Small cap58401,1221,220
Unknown0011
Total2141693,5983,981

Most preferred stock is "perpetual", which means that it remains outstanding forever (i.e. there is no maturity date). However, most preferred stock is "callable" by the issuer - i.e. it can be redeemed by the company, at the company's option, typically after they give investors a 30 day or 60 day advanced notice. Most preferred stock cannot be redeemed right away (immediately after issuance). Typically, preferred stock is callable only after it has been on the market for a few years. Preferred stock is redeemed or called quite often before maturity, for all number of reasons. For example, if interest rates fall, the company may call its preferred shares and issue another series with a lower yield. Shares can continue to trade past their call date if the company does not exercise this option.

Preferred stock is very much a "hybrid" security that acts somewhat like a bond and somewhat like a common stock. Generally the market price of a preferred stock does not vary as much as a company's common stock. Preferred stocks can be more volatile than a bond, especially when the company is going through significant market stress or during periods of a stock market crash. If the stock market is relatively stable and there is nothing major going on with the company, preferred stocks tend to act like a bond, in the sense that they tend to go up or down in response to changing interest rates. But during a stock market crash, a preferred stock can often act more like a common stock than a bond.

Cumulative Preferred Stock

Some preferred stock is "cumulative" preferred stock, meaning that if the company misses a scheduled dividend payment on the preferred stock, the dividends owed must be paid out in the future before common stock shareholders can receive any dividend payments. And if the company ever tries to redeem or call the preferred stock, they have to redeem the stock at price that includes the missed dividends. So preferred stock that is cumulative starts to act almost like debt, because the company is required to accrue and/or pay the dividends.

Cumulative# of SecuritiesMarket cap%Avg Dividend Yield
No221$94,620,998,19649%5.83%
Yes356$100,288,101,57751%5.88%
Total577$194,909,099,773100% 5.85%

Convertible Preferred Stock

Some preferred stock is convertible, meaning it can be exchanged for a given number of common shares under certain circumstances. The board of directors might vote to convert the stock, the investor might have the option to convert, or the stock might have a specified date at which it automatically converts. Here's a breakout:

Category# of SecuritiesMarket cap%Avg Dividend Yield
Convertible41$34,123,118,40218%5.97%
Non-convertible536$160,785,981,37182%5.83%
Total577$194,909,099,773100% 5.85%

Convertible preferred stock is much more difficult to analyze because it usually contains a complex formula to determine the conversion ratio between the preferred stock and the common stock. It often isn't easy to understand whether it is a good deal or a bad deal to convert the preferred stock into common stock. Because the value of convertible preferred stock is tied to the value of the company's common stock, you often find that convertible preferred stock trades at a much greater discount or premium to par value compared to non-convertible preferred stock.

Preferred Stock Symbols

Preferred stocks are often a pain because they have ticker symbols that can vary from website to website. Some preferred stocks have "normal" symbols such as "AIZP" that are universally referenced the same way. But many companies issue several different series of preferred stocks (series A, series B, etc...) and thus try to start using special preferred stock symbols with a series designator. That's what creates the confusion, as not all websites handle the series reference the same way. We use the syntax "ALLY-A", but some sites use "ALLY A", or "ALLY^A" or "ALLYpA" or "ALLY-PA".

WebsiteALLY-ADTLA-
NasdaqALLY^ADTLA^
NYSEALLYpADTLAp
IEX exchangeALLY-ADTLA-
Yahoo FinanceALLY-PADTLA-P
Google FinanceALLY-ADTLA-

Size Categories

Most preferred stock issuances are pretty small. Here's a breakout:

Category# of SecuritiesMarket cap%Avg Dividend Yield
Large cap2$20,309,356,54410.4%4.7%
Micro cap436$47,792,695,35324.5%7.6%
Mid cap8$38,720,946,78419.9%4.8%
Small cap131$88,086,101,09245.2%5.7%
Total577$194,909,099,773100% 5.85%

As explained in our article size categories, there is no standard definition of what makes up a "large cap" stock. On our website, we use: Large cap > $10 billion, Mid cap between $2 billion and $10 billion, small cap between $300 million and $2 billion and micro cap <$300 million.

Issuing Entities

Preferred stocks can be issued by various types of entities. Here's a breakout:

Entity Type# of SecuritiesMarket cap%Avg Dividend Yield
3$00.0%0.0%
ADRs7$7,475,624,8933.8%1.3%
BDCs2$129,448,6000.1%6.5%
Closed-end fund32$2,243,099,8041.2%5.6%
Common stocks290$146,014,316,93874.9%5.6%
MLPs38$6,051,393,1043.1%10.0%
Mortgage REITs54$8,024,663,5644.1%8.8%
Privately held24$4,162,120,4472.1%7.2%
REITs127$20,808,432,42310.7%6.7%
Total577$194,909,099,773100% 5.85%

When the entity type is "Privately held", that means that the preferred stock was issued by an entity that does not have common shares that are publicly traded on a stock exchange.

Note that there are a lot of preferred stocks issued by BDCs, closed end funds, MLPs, mortgage REITs and REITs. That makes sense because these types of entities are yield focused entities - many investors buy these entity types because they are looking for a high dividend yield. Issuing preferred stock is one way that these entities can attempt to boost their dividend yield to common stockholders, in essence using a form of leverage.

Most of the "common stock" issuers are banks and other financial institutions. Here's a breakout of the common stock issuers by GICS sector:

GICS Sector# of SecuritiesMarket cap%Avg Dividend Yield
Communication Services5$3,255,860,3012.2%5.0%
Consumer Discretionary7$1,286,400,0000.9%7.9%
Consumer Staples3$193,521,1670.1%8.6%
Energy4$237,539,3600.2%12.4%
Financials189$86,344,053,26059.1%5.8%
Health Care11$7,180,131,8784.9%4.9%
Industrials36$5,068,286,9803.5%6.2%
Information Technology2$3,611,933,3662.5%7.3%
Materials3$228,683,1180.2%4.6%
Real Estate1$46,773,0000.0%7.2%
Utilities29$38,561,134,50826.4%4.9%
Total290$146,014,316,938100% 5.60%

$25 Liquidation Values

There is no rule that requires it, but the tradition has become that most preferred stocks have a $25 liquidation value. That makes it easy to tell if the stock is trading at a discount or premium, because you can just compare the current market price to $25.00. Here are the liquidation values as of now:

Liquidation Value# of SecuritiesMarket cap%Avg Dividend Yield
4$456,480,0000.2%0.0%
0.002$393,220,5670.2%15.6%
8.501$20,125,0000.0%7.3%
10.005$37,892,3910.0%16.1%
25.00527$152,890,905,97878.4%6.1%
40.001$62,775,0000.0%7.9%
50.0014$4,301,755,7272.2%6.5%
100.0015$12,158,578,3106.2%3.0%
1000.008$24,587,366,80012.6%5.6%
Total577$194,909,099,773100% 5.85%

It can be confusing with preferred stocks to separate a "par value" from a "liqudation value". What exactly is "par value" versus "liquidation value"? The concept of par value was originally an accounting concept. It is the value that determines how much of the proceeds from the issuance of a stock gets recorded as "common stock" or "preferred stock" on a company's balance sheet versus "additional paid in capital". A lot of preferred stock gets issued with a par value of $.01 per share. But it has a liquidation value of $25.00 per share. Liquidation value is the stated value per share in the event of a company liquidation, as a way to determine the priority of claims of creditors versus stock holders. Liquidation value is also used to determine the actual dividends per share on a preferred stock. For example, a preferred stock with a dividend rate of 5% would pay 5% of the liquidation value, which is usually $25 per share.

In day to day practice, however, many people refer to the $25 liquidation value of a preferred stock as simply the "par value", even though technically the par value might be $.01 per share. It's a loose way of referring to what really matters, which is the liquidation value.

Preferred stock ADRs

It is very common for preferred stock to be trading in the form of an American Depository Receipt, or "ADR". Most people think of an ADR as the common stock of a foreign corporation that is trading on a U.S. stock exchange as an ADR, as explained in our article what is an ADR?. But a lot of preferred stock is issued by American corporations via the same ADR process.

Why are so many preferred stocks issued as ADRs? We don't really know. It could be because companies want to issue their preferred stock at a $25 liquidation or par value, as explained above. An ADR can be issued with a "ratio" between the ADR and the actual security that is not equal to one. In other words, you can issue an ADR that is worth 25 shares of the actual stock. So if a company has a preferred stock with a liquidation value of $250, they can issue an ADR with a one to 10 ratio, thus creating a preferred stock that trades with a $25 liquidation value.

Performance

Preferred stocks are very much a "hybrid" security in that they act somewhat like a bond and somewhat like a common stock. The average dividend yield of preferred stocks right now is 5.85%, compared to the average dividend yield of the stocks in the S&P 500 Index of 1.86%. The higher dividend yield is great, but preferred stocks typically don't appreciate in value like common stocks.

Let's look at the performance of preferred stocks using PFF, the iShares S&P US Preferred Stock Fund ETF, which tracks the S&P U.S. Preferred Stock Index. PFF is a good proxy for the preferred stock market since it includes all exchange traded preferred stocks with a market cap of more than $100 million. Let's compare the market price history of PFF to the market price history of SPY, the SPDR S&P 500 ETF:


But the above obviously ignores PFF's higher dividend yield. Let's look at the performance of PFF, including dividends, to SPY, including dividends, using our total return symbols, which calculate the returns on an ETF including dividends, assuming that dividends are reinvested :


Note that in the above charts that when common stocks crashed in 2008, preferred stocks also crashed. That's another illustration of the hybrid nature of preferred stocks - they can go up and down in market value, making them at times more like a common stock than a bond.

How do preferred stocks perform compared to bonds? Let's compare the market price history of PFF to the market price history of AGG, the iShares Core U.S. Aggregate Bond ETF. AGG is a good proxy for the investment grade bond market as it tracks an index of virtually all U.S. dollar denominated investment grade bonds on the bond market. AGG's current dividend yield is 2.43%.


Let's also look at the performance of PFF, including dividends, to AGG, including dividends, using our total return symbols, which calculate the returns on an ETF including dividends, assuming that dividends are reinvested:


Sensitivity to changing interest rates

Most preferred stocks have a fixed dividend rate that is determined when the preferred stock is issued. What happens to the market price of a preferred stock as interest rates change?

With most bonds that pay a fixed rate of interest, it is usually pretty certain that the market value of a bond will go down if interest rates go up, and vice versa. Does the same thing happen with preferred stock?

One simple way we try to measure a security's sensitivity to changing interest rates is by calculating the correlation between the security's market price and TNX, a CBOE index that tracks yields on ten year treasury notes. PFF's correlation to TNX over its life time has been 27%. By comparison, AGG's correlation to TNX over its life time has been -94%. So with AGG (i.e. investment grade bonds), it is clear: as interest rates go up, the value of investment grade bonds goes down. With PFF, it has not been so clear. A correlation of 27% is such a weak number that you can't read anything into it.

Can you a see a correlation between PFF and TNX on a chart?


The stock market crash in 2008 had such a big effect on preferred stocks that it overwhelmed the effect on preferred stocks of the declining interest rates that were also happening. That's probably why PFF's correlation to TNX has only been 27%. Let's look at the same comparison but only over the last five years:


Generally speaking, when there is nothing major happening at a company, and the stock market is not in a significant bear market, a preferred stock will go up in down in response to changing interest rates, as you might expect. But if the stock market crashes, or a company experiences financial distress, the preferred stock will start to act more like a common stock, regardless of interest rates.

ETFs that buy preferred stock

There are now 16 ETFs and ETNs that either buy preferred stock or track an index of preferred stock:

SymbolDescriptionInception DateLeverage FactorCurrent YieldActions
PGFInvesco Financial Preferred ETF12/01/20061.005.26%Analyze
PFFiShares S&P US Preferred Stock Fund ETF03/26/20071.005.68%Analyze
PGXInvesco Preferred Portfolio ETF01/31/20081.005.39%Analyze
PSKSPDR Wells Fargo Preferred Stock ETF09/16/20091.005.49%Analyze
IPFFiShares International Preferred Stock ETF11/15/20111.005.18%Analyze
PFXFMarket Vectors Preferred Securities ex Financials ETF07/16/20121.005.81%Analyze
SPFFGlobal X SuperIncome Preferred ETF07/16/20121.005.92%Analyze
VRPInvesco Variable Rate Preferred ETF05/01/20141.004.98%Analyze
EPRFS&P High Quality Preferred ETF05/23/20161.005.33%Analyze
PFFRInfraCap REIT Preferred ETF02/07/20171.006.97%Analyze
PREFPrincipal Spectrum Preferred Securities Active ETF07/10/20171.004.83%Analyze
PFFDGlobal X U.S. Preferred ETF09/11/20171.005.29%Analyze
PFFAVirtus InfraCap U.S. Preferred Stock ETF05/15/20181.0013.54%Analyze
PFFLETRACS Monthly Pay 2x Leveraged Preferred Stock ETN09/25/20182.0014.27%Analyze
PFLDAAM Low Duration Preferred and Income Securities ETF11/27/20191.003.46%Analyze
PFFVGlobal X Variable Rate Preferred ETF06/24/20201.000.00%Analyze


All data is a live query from our database. The wording was last updated: 05/06/2020.

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