As a finance expert, I often get asked about the best ways to generate passive income while minimizing risk. Preferred stocks offer a compelling middle ground between bonds and common stocks, providing higher yields than most fixed-income securities while maintaining priority over common equity in dividend payments and liquidation scenarios. In this article, I’ll analyze six preferred stocks that stand out for their strong fundamentals, reliable payouts, and long-term stability.
Table of Contents
Why Preferred Stocks?
Preferred stocks combine features of both equity and debt. They pay fixed dividends like bonds but trade on exchanges like stocks. Unlike common dividends, preferred dividends must be paid before any distributions to common shareholders. If a company faces financial distress, preferred shareholders rank above common stockholders in claims on assets.
The yield on preferred stocks is typically higher than that of common stocks or corporate bonds. For example, if a preferred stock trades at P = \$25 with an annual dividend of D = \$1.56, its yield is:
Y = \frac{D}{P} = \frac{1.56}{25} = 6.24\%This yield advantage makes preferred stocks attractive for income-focused investors.
Key Metrics to Evaluate Preferred Stocks
Before diving into specific picks, let’s outline the key metrics I use to assess preferred stocks:
- Dividend Yield – The annual dividend divided by the current price.
- Call Risk – Many preferred stocks are callable, meaning the issuer can redeem them at a set price.
- Credit Rating – Indicates the issuer’s financial strength.
- Dividend Coverage – The company’s ability to sustain payouts.
- Liquidation Preference – Priority in case of bankruptcy.
Now, let’s examine six preferred stocks that meet these criteria.
1. Bank of America Series L (BAC.PRL)
Dividend Yield: ~5.8%
Credit Rating: BBB+ (S&P)
Bank of America is one of the most stable financial institutions in the U.S. Its Series L preferred shares offer a solid yield with strong dividend coverage. The bank’s CET1 ratio (a measure of financial strength) stands at 11.2\%, well above regulatory requirements.
Why Hold It?
- Backed by a too-big-to-fail bank.
- Non-cumulative, but the bank has a strong history of maintaining dividends.
2. AGNC Investment Corp 6.5% Series C (AGNCN)
Dividend Yield: ~6.5%
Credit Rating: BB (High Yield)
AGNC is a mortgage REIT that invests in agency-backed securities. While REITs carry interest rate risk, AGNC’s portfolio is primarily composed of government-guaranteed mortgages.
Why Hold It?
- Fixed-to-floating rate structure protects against rising rates.
- High yield with monthly distributions.
3. Brookfield Renewable Partners Series 16 (BEP.PRA)
Dividend Yield: ~5.4%
Credit Rating: BBB
Brookfield Renewable is a leader in clean energy infrastructure. Its preferred shares provide stable income backed by long-term power purchase agreements.
Why Hold It?
- Exposure to renewable energy growth.
- Strong cash flow coverage with a payout ratio below 70\%.
4. JPMorgan Chase Series MM (JPM.PRM)
Dividend Yield: ~5.6%
Credit Rating: A-
JPMorgan’s preferred shares are among the safest in the banking sector. The firm’s robust earnings ensure consistent dividend payments.
Why Hold It?
- Low risk of suspension.
- Attractive yield relative to investment-grade bonds.
5. Energy Transfer Series D (ET.PRD)
Dividend Yield: ~7.2%
Credit Rating: BB+
Energy Transfer operates critical midstream energy assets. Its preferred shares offer a high yield with solid coverage from fee-based revenue.
Why Hold It?
- Resilient business model with long-term contracts.
- Strong free cash flow supports dividends.
6. Wells Fargo Series L (WFC.PRL)
Dividend Yield: ~6.0%
Credit Rating: BBB+
Despite past controversies, Wells Fargo remains a dominant bank. Its preferred shares provide a reliable income stream.
Why Hold It?
- Strong capital position.
- Attractive valuation compared to peers.
Comparison Table
| Preferred Stock | Ticker | Yield | Credit Rating | Call Risk |
|---|---|---|---|---|
| Bank of America Series L | BAC.PRL | 5.8% | BBB+ | Moderate |
| AGNC Investment Series C | AGNCN | 6.5% | BB | High |
| Brookfield Renewable Series 16 | BEP.PRA | 5.4% | BBB | Low |
| JPMorgan Chase Series MM | JPM.PRM | 5.6% | A- | Moderate |
| Energy Transfer Series D | ET.PRD | 7.2% | BB+ | High |
| Wells Fargo Series L | WFC.PRL | 6.0% | BBB+ | Moderate |
Risks to Consider
While preferred stocks offer stability, they are not risk-free:
- Interest Rate Sensitivity – Preferred stocks often decline in value when interest rates rise.
- Call Risk – Issuers may redeem shares if rates fall.
- Dividend Suspension – Non-cumulative preferreds may skip payments without obligation to repay.
Final Thoughts
Preferred stocks are an excellent tool for income investors seeking higher yields than bonds with less volatility than common stocks. The six picks I’ve highlighted provide a mix of safety and yield, making them strong candidates for a buy-and-hold strategy.
