Preferred Stocks for Retirement Income: One Rung Up the Ladder

The same company whose common stock yields 2% might pay 6% or 7% on a class of shares most retirees have never bought: preferred stocks for retirement income. A preferred stock is a special class of shares that pays a fixed dividend, sits above common stock on the company's payout ladder, and is typically priced to yield more than the same company's common shares. That yield gap is real, but so are the tradeoffs that come with it, and understanding both is what separates a preferred that belongs in a retirement portfolio from one that doesn't.

Here is what preferred stocks are, how they differ from a company's common stock, and whether they belong in a retirement portfolio.  

Preferreds are one income tool. For the framework they sit inside, grab the first chapter of How to Retire on Dividends free. It walks through the contrarian income approach we use to build a portfolio that pays you without selling shares. 

What "One Rung Up the Ladder" Means

Think of every company as a ladder of people it owes money to. When money comes in (or when the company gets sold or goes bust), whoever is highest on the ladder gets paid first, and whoever is at the bottom gets paid last, if there's anything left.

At the bottom of the ladder are the common shareholders. Common stock is what most people think of when they think of "owning a stock." When times are good, common shareholders get whatever dividend the board decides to pay, plus any share-price growth on top. When times are bad, they get nothing until everyone above them is paid.

One rung up are the preferred shareholders. Preferreds aren't quite bonds; they're a class of stock. But the dividend on them is set at issuance and treated more like a bond coupon than a stock dividend. The company has to pay preferred dividends before it can pay a penny to common shareholders. A preferred dividend isn't guaranteed, a company in real trouble can still suspend it, but if the board is cutting anything to preserve cash, it cuts the common first. Above the preferred shareholders sit the bondholders, whose interest is a legal obligation the company can't skip without going into default.

The tradeoff. The company pays for that priority by giving preferred shareholders less upside. If the stock triples, common shareholders capture the growth; preferred shareholders keep collecting the same fixed dividend they were promised at issuance. For a retiree who's after income rather than growth, that trade often works.

The concrete gap. Back in 2018, Bank of America issued a preferred series paying a 5.875% coupon (Series HH, per its SEC filing). At the time, the bank's common stock paid a much lower yield, which is how these deals are typically priced. That specific series is still trading today as BAC.PR.K, and its story is a good preview of the next section: it passed its first call date in July 2023, and the bank chose not to redeem it. The pattern holds: the same company, in the same environment, generally pays more on its preferred than on its common. And the issuer, not the buyer, decides when the arrangement ends. 

Why Preferreds Behave Like Perpetual Bonds

Preferreds are often described as behaving like a special kind of bond called a "perpetual bond": a bond with no maturity date, no end point at which the issuer returns your principal. Regular bonds mature; a perpetual bond doesn't. It just keeps paying interest, in theory forever, until the issuer decides to buy it back. Preferreds work the same way, and two mechanics make that behavior consequential for a retiree: how they move with interest rates, and what happens when the company decides to end them. 

Rate Sensitivity

Because there's no maturity, the market value of a preferred moves with long-term interest rates. Say you buy a preferred paying $1.50 a year on a $25 share, a 6% yield. If long-term interest rates rise sharply and new preferreds are being issued at 8% yields, a new buyer won't pay $25 for your 6% preferred, they can get 8% elsewhere. Your preferred's market price falls until its yield matches what's available new, which for the math to work at 8% means the price drops to around $18.75. The dividend keeps landing in your account, still $1.50 a year. But the paper value of your position has fallen 25%. Preferreds behave the way long-duration bonds do, for the same reason. 

Our research on Fed and Treasury interventions looked at 14 rate-intervention episodes across four countries. The scheduled, telegraphed operations, the kind the Treasury announces on a published calendar, bought a median of zero days of sustained relief on long-term yields. In plain terms, when the authorities announce buybacks and other calendar-driven operations, long rates don't stay down. That's the environment a preferred lives in.   

The Call Feature

Most preferreds come with a "call" feature, which lets the company buy them back from you at $25 per share on or after a specific date. Companies use this when it's advantageous to them: if rates fall and they can issue a new preferred at 4% instead of the 6% they're currently paying, they'll call the old preferred and refinance. You get $25 per share back, and you go looking for another 6% preferred in a market that's now offering 4%. The call feature caps how far a preferred's price can rise when rates fall, because the market prices in the possibility of a call.

The Bank of America Series HH preferred from the previous section is a live example. It passed its first call date in July 2023, and the bank chose to leave it outstanding. The call feature is the issuer's option, not the buyer's, and issuers exercise it on their timing, not yours.

What this adds up to. Preferreds pay a fixed above-average dividend that ranks above the common dividend and keeps arriving through rate cycles. Their market prices move with long-term interest rates, and the call feature limits how much upside a preferred can have if rates fall. That combination is why preferreds are often described as sitting somewhere between stocks and bonds: fixed income like a bond, priority claim like a bond, but capped upside and no maturity date. Does that combination fit a retiree's portfolio? That is the question we work through in the sections that follow.  

Preferreds and Your Tax Bill

Preferred stocks come with a tax wrinkle worth knowing before you buy them. Many preferred-stock dividends can qualify for the lower tax rates that apply to qualified dividends, just like dividends from common stocks. But the treatment isn't universal. Some preferreds, including many issued by REITs, may produce dividends taxed as ordinary income rather than at qualified-dividend rates. Investors also have to meet IRS holding-period requirements to receive qualified-dividend treatment.

For a retiree, the practical takeaway is that where you hold preferreds can materially affect their after-tax income. Preferred dividends inside a Roth IRA or traditional IRA aren't taxed year by year. With a traditional IRA, taxable withdrawals are generally taxed as ordinary income; with a Roth IRA, qualified withdrawals are tax-free. In a taxable brokerage account, the qualified-vs-ordinary distinction can make a real difference in what you keep.

This is general information, not tax advice, worth a conversation with someone who knows your full picture.

For the full breakdown of how dividends work in retirement across account types, see our guide on how dividends are taxed in retirement. 

Where Preferreds Fit in a Retirement Portfolio

After all of this, the practical question is: how much of a retirement portfolio should be in preferreds, and who are they actually right for?

Preferreds earn a real seat for income-focused retirees. They typically offer higher income than common shares from the same issuer, and they rank above common stock for dividends and claims on assets. For an income-focused retiree, preferreds can serve as a smaller satellite allocation alongside common stocks and bonds. How large that sleeve should be depends on the portfolio's other income sources, rate and credit exposure, and tolerance for volatility.

Preferreds work best as a middle rung in a diversified income portfolio. They aren't a replacement for dividend-growth stocks (which raise their payouts over time and hedge against inflation), and they aren't a replacement for bonds (which generally have a stated maturity at which principal is due). They fill a gap between the two: potentially higher income than many common stocks, priority over common shareholders in the capital structure, and income that is generally more stable than a common-stock dividend but without the scheduled principal repayment of a traditional bond. For a retiree whose income needs are met by a mix of dividend stocks, bonds, and preferreds, no single asset class carries the whole plan.

The retiree instinct to check first is always the yield. A preferred yielding well above the current market is worth a hard second look before buying. That yield is usually the market telling you it sees risk somewhere: dividend suspension risk, credit stress at the issuer, or a call feature the buyer isn't accounting for. The goal isn't to find the highest yield. It's to understand why the yield is high and whether you're being adequately compensated for the risk behind it.

For picking preferreds, the same discipline that applies to any income holding applies here: check the issuer's balance sheet, the specific series' terms (call date, coupon, whether it's cumulative), the price relative to par and yield-to-call, and the issuer's record of maintaining the payment. Our guide on dividend cut warning signs covers the flags that matter most for individual securities. And preferreds sit inside a broader income-stock discussion that starts on our piece on the best dividend stocks for retirement.

This isn't theoretical. Our contrarian income recommendations have averaged 9.4% annualized total returns since inception in August 2015, with most gains paid as dividends. See the full track record.

Preferred Stocks for Retirement Income: Frequently Asked Questions

What is a preferred stock?

A preferred stock is a special class of shares that ranks above common stock for dividend payments and claims on assets in liquidation. Preferreds typically pay a stated dividend and usually offer less participation in a company's growth than common shares. In exchange, preferred shareholders receive their dividends before common shareholders and rank ahead of them if the company is liquidated, although they remain behind bondholders and other creditors. Preferreds are often described as hybrids because they combine characteristics of stocks and bonds. 

Are preferred stocks safer than common stocks?

Preferred shareholders rank ahead of common shareholders for dividends and claims on assets, giving them greater protection in some company-specific stress scenarios. A company generally cannot pay common dividends while failing to meet required preferred dividends, although the exact rights depend on the preferred's terms. But preferreds are not risk-free. Their market prices move with long-term interest rates (they fall when rates rise), companies can suspend preferred dividends in genuine trouble, and the issuer can call the preferred back at par when it's advantageous to the company. Preferred stocks are generally safer than common stocks in specific ways, not universally safer. 

Do preferred stocks pay higher dividends than common stocks?

Preferred stocks are generally designed to provide relatively high current income. Their stated dividends are usually set when the securities are issued, although some preferreds have floating or adjustable rates. Unlike common dividends, preferred payments generally don't increase simply because the company's earnings grow. That higher current-income potential comes with tradeoffs, including limited growth participation, interest-rate sensitivity, credit risk, and call risk. 

How are preferred dividends taxed?

Many preferred-stock dividends can qualify for the lower tax rates that apply to qualified dividends, but the treatment isn't universal. Some preferreds, including many issued by REITs, may produce dividends taxed as ordinary income rather than at qualified-dividend rates. Investors also have to meet IRS holding-period requirements to receive qualified-dividend treatment. Where you hold your preferreds matters too: preferreds inside a Roth IRA or traditional IRA aren't taxed year by year, while a taxable brokerage account is where the qualified-vs-ordinary distinction actually hits. 

Are preferred stocks good for retirement income?

For an income-focused retiree, preferreds can serve as a satellite allocation alongside common stocks and bonds. They can offer attractive current income and rank above common shares in the issuer's capital structure, which can make them useful as a middle rung between dividend-growth stocks and traditional bonds. How large a preferreds sleeve should be depends on the portfolio's other income sources, the retiree's rate and credit exposure, and their tolerance for the tradeoffs that come with preferreds specifically (often no maturity date, and frequently callable at the issuer's option). 

What are the risks of buying preferred stocks?

Three risks matter most for a retiree. Rate risk: because many preferreds are perpetual or have very long maturities, their market prices behave like long-duration bonds and can fall sharply when long-term interest rates rise. Call risk: the issuer can buy the preferred back at par when it's advantageous to them, which usually happens when rates fall and you'd most want to keep the yield. Credit risk: a company in serious financial trouble can suspend its preferred dividend, and for non-cumulative preferreds, those missed payments may never be recovered. 

The Preferred That Belongs in Your Retirement Portfolio

The preferred stock question, in the end, isn't really about preferreds. It's about the job you're hiring one to do.

If you're building a portfolio meant to pay you for the rest of your life, you're hiring the preferred to produce income you can count on, one rung up from the common shareholders in a downturn, and priced to pay you more today than the same company's common stock would.

The tradeoffs are what this piece has walked through. No maturity means rate sensitivity. The call feature means the issuer, not the buyer, decides when the arrangement ends. And a high advertised yield can be the market telling you it sees a risk the buyer hasn't priced in yet.

Pick the preferred by what funds the dividend, what protects it, and what could take it away. A preferred that pays more than what common shareholders get, from a company strong enough to keep paying it through a rate cycle, is the trade this asset class was built for. 

Get the first chapter of How to Retire on Dividends free, and see how our contrarian income approach builds retirement income you can count on, without selling shares or timing the market.