Preferred Securities: High After-Tax Yields Now
- For investors seeking tax-efficient income,preferred securities present a compelling alternative to solely relying on municipal bonds.
- Preferred securities combine elements of both stocks and bonds, generally offering higher yields than similarly rated bonds due to their lower position in the capital structure.Investors might consider...
- While offering attractive after-tax yields, preferred securities come with increased risk.
Looking for tax-advantaged income? Preferred securities currently offer some of teh highest after-tax yields in the fixed income market. These hybrid securities, combining features of stocks and bonds, present a compelling alternative to municipal bonds, often with notable tax advantages. Consider low-duration preferreds for capital preservation, but be aware of the increased risk. The ICE Bank of America Fixed rate Preferred Securities Index yields over 5.3%.Qualified dividends on preferred stocks are usually taxed at a maximum of 20% — a key consideration, highlighted in News Directory 3 reports. Investors should carefully evaluate risk tolerance and consult financial advisors. Discover what’s next by examining how these securities might fit into your portfolio.
Preferred Securities Offer Tax-Advantaged Income Option
Updated May 26,2025
For investors seeking tax-efficient income,preferred securities present a compelling alternative to solely relying on municipal bonds. These securities, typically issued by investment-grade companies, currently provide some of the highest after-tax yields in the fixed income market, according to Wharton Wealth Planning.
Preferred securities combine elements of both stocks and bonds, generally offering higher yields than similarly rated bonds due to their lower position in the capital structure.Investors might consider low-duration preferreds to prioritize capital preservation, according to David Rosenstrock, CFP®, MBA, director and Founder of Wharton wealth Planning.
While offering attractive after-tax yields, preferred securities come with increased risk. Investors seeking income and willing to accept this additional risk may find them suitable. However, those with more conservative risk tolerances might prefer investment-grade corporate bonds, which offer yields around 5% with less credit risk.
The ICE Bank of America Fixed Rate Preferred Securities Index currently yields over 5.3%, a level at the high end of the pre-pandemic range but below its recent peak of 7.8%.
Because preferred securities often have long or perpetual maturities, their prices and yields can be sensitive to changes in the long end of the Treasury yield curve. Unless rates decline considerably, short-term appreciation potential may be limited.
Qualified dividends from preferred stocks are typically taxed at a maximum rate of 20%, compared to 37% for interest income (plus a 3.8% Medicare surcharge). This can be particularly beneficial for high-income earners. Though, some preferred stocks pay interest rather of qualified dividends, so understanding the tax implications is crucial.
Preferred securities compare favorably to municipal bonds on key risk factors, despite the perception that municipal bonds are lower risk. Both have historically low default rates, and the preferred market is largely composed of companies with strong cash flow.
What’s next
Investors should carefully evaluate their risk tolerance and tax situation before investing in preferred securities.Consulting with a financial advisor can definitely help determine if these securities are a suitable addition to their portfolio.