Preferred Securities: Balancing Yield with Risk

Preferred securities are a type of investment that generally offers higher yields than traditional fixed income securities, such as U.S. Treasury securities or investment-grade corporate bonds. However, the higher yields come with different risks.

Preferred securities are sometimes considered by investors seeking higher income. They were also one of the hardest-hit investments during the 2008-2009 global financial crisis and in the early stages of the 2020 COVID-19 pandemic. What should you be aware of now to decide whether preferred securities might be the right investment for you for a more-aggressive part of your income portfolio?

What are preferred securities?

Preferred securities are "hybrid" investments, sharing characteristics of both stocks and bonds. In fact, there are many types of preferred securities, each with their own set of characteristics or guarantees. Lately, the term "preferred security" has been used as a blanket term for an investment with a par value of $25, but they can rank as high as a senior bond or as low as traditional preferred stock.1

Bond-like characteristics:

Fixed par value. This is the value for which a preferred can be redeemed by the issuer. Preferred securities often have par values of $25, making it relatively easy for individual investors to invest in given the smaller denomination compared to the $1,000 par value for most corporate bonds. There are preferred securities issued in $1,000 denominations, however, but they tend to be targeted towards institutional investors. While preferreds have fixed par values, their prices still fluctuate in the secondary market.