There's a $1.2 trillion asset class yielding 5–7% that most investors have never heard of: perpetual preferred stock. Banks and insurance companies issue these hybrid securities to meet regulatory requirements. Retail investors avoid them because they're confusing. Institutions quietly collect the dividends because the tax treatment is exceptional. |
|
| | | | | | | Elon Musk is about to take SpaceX public in what's set to be the biggest IPO ever. | But there's no need to wait for the company to go public. | You can claim your stake today. The New York Times predicted it "will unleash gushers of cash for Silicon Valley and Wall Street." | If you click here and learn what to do, some of that cash could end up in your pocket. |
| |
| | |
| What Perpetual Preferreds Actually Are | Think of preferred stock as the middle child of corporate securities. It sits below bonds (debt) but above common stock (equity) in a company's capital structure. |  | Company's capital structure |
| "Perpetual" means no maturity date. Ever. You can't hold out until the company pays back your principal because there is no payback date. Your only exit is selling in the secondary market. You also get no voting rights. | In exchange, you get "preference" in dividend payments. The company must pay you before common shareholders, creating more predictable income than regular stock dividends. |
|
| | Why Do Banks Issue Them? | Banks and insurers account for 75% of preferred issuance, driven by post-2008 regulations requiring capital that can absorb losses without bailouts. Preferreds fit perfectly because dividends can be suspended without triggering default, the capital is permanent, and it doesn't dilute voting power. | A few weeks ago, we discussed the STRC ticker, which offers a 10% yield and also falls into this category. |
|
| | The Yield Advantage (And Where It Comes From) | Preferreds typically yield 1.5–2.5 percentage points more than investment-grade bonds from the same issuer, and investment-grade perpetual preferreds currently earn 5–7% for quality names. Some riskier ones yield more than 10%. Here are some of the tickers you can check out. | Here are examples across risk levels. | Company | Ticker | Approx. Yield | Category | Notes | Strategy Inc. | STRC | ~11.25% | Perpetual Preferred | Variable-rate perpetual; pays a monthly dividend. | Strategy Inc. | STRF | ~10.0% | Perpetual Preferred | Senior fixed-rate perpetual preferred. | Strategy Inc. | STRD | ~10.0% | Perpetual Preferred | Fixed-rate perpetual; among higher-yielding series. | Strategy Inc. | STRK | ~9.6% | Perpetual Preferred | Fixed-rate perpetual; comparatively lower yield within series. | JPMorgan Chase & Co. | JPM preferred series | ~5.5%–6.0% | Bank Preferred | Investment-grade bank perpetuals; fixed or fixed-to-float. | Bank of America Corp. | BAC preferred series | ~5.5%–6.5% | Bank Preferred | Multiple perpetual and fixed-to-float issues. | Citigroup Inc. | C preferred series | ~7.0% | Bank Preferred | Higher yield relative to peers; varies by issue. | Morgan Stanley | MS preferred series | ~6.0%–7.0% | Bank Preferred | Institutional-grade bank perpetuals. | Wells Fargo & Co. | WFC preferred series | ~5.5%–6.5% | Bank Preferred | Typical $25-par retail bank preferreds. | Public Storage | PSA preferred series | ~6.5%–7.5% | REIT Preferred | Investment-grade REIT perpetual preferreds. | Bread Financial Holdings | BFH.PRA | ~10.5% | Financial Services Preferred | Higher-yielding preferred; reflects higher credit risk. |
| That extra yield compensates for two major risks: | Interest rate sensitivity: Because there's no maturity, prices swing violently. If rates rise 1%, a 10-year bond might drop 7%, but a perpetual preferred could drop 17%—more than double. | Subordination risk: In bankruptcy, you get paid after bondholders but before common shareholders. You're protected if the company struggles, but your shares get wiped out if it fails. |
|
| | The Tax Benefits | For many investors, the tax treatment is what makes preferreds compelling. | For individuals: Most preferred dividends qualify as "Qualified Dividend Income" (QDI), taxed at capital gains rates ranging from 0%, 15%, or 20%, depending on your bracket. Compare that to bond interest, which is taxed as ordinary income at rates up to 37%. | A 6% preferred dividend taxed at 15% gives you an after-tax yield of 5.1%. A 6% corporate bond taxed at 37% nets you only 3.78%. | For corporations, the tax advantage is even better. Corporations can deduct 50% or more of dividends received from other corporations through the Dividends Received Deduction (DRD). This makes preferreds extraordinarily efficient for corporate treasury management. | So, basically, it is a good fit for: | Income investors in taxable accounts (QDI tax treatment boosts after-tax yields) Those who can handle 15–20% price swings without panic-selling Investors who understand this isn't "safe" fixed income
| And a poor fit for: | Conservative investors seeking principal preservation Those needing predictable liquidity Anyone confused about what they're actually buying
| If 10-year Treasury yields stabilize in the 3.75%–4.5% range, rate-driven price volatility in perpetual preferreds should moderate. |
|
| | The Bottom Line | Perpetual preferred stocks aren't junk bonds, but they're also not the "safe" high-yield alternative they're sometimes marketed as. | The yields are real. The tax benefits are real. The income priority over common stock is real. | But so is the interest rate sensitivity. So is the subordination risk. So is the discretionary nature of the dividends. | Think of preferreds as a tactical income tool for portfolios that can absorb volatility, not as a bond substitute. In the current environment of tight credit spreads and stabilized rates, the opportunity looks moderate—not compelling, not terrible. | If you understand you're buying something that acts like a stock when markets crash but pays like a bond when things are calm, preferreds can work. Just don't confuse dividend preference with actual safety. |
|
| | | | | Important disclosures: This newsletter is provided for informational purposes only and does not constitute investment advice. All investments involve risk, including possible loss of principal. Please consult with your financial advisor before making investment decisions. |
| |
| | |
|
|
Post a Comment
Post a Comment