Investors on the hunt for portfolio income may want to look at newly issued preferred securities from banks, according to Bank of America. Preferred securities combine attributes of stocks and bonds. Like equities, they trade publicly on exchanges. They also offer investors a stream of income, typically paid on a quarterly basis. These income payments can exceed 5%, but investors may receive favorable tax treatment. The coupons are typically subject to the same tax rate as capital gains: 0%, 15% or 20%, depending on your taxable income. That’s different from bonds, whose income payments are taxed as ordinary income, meaning they’re subject to rates as high as 37%. Banks and the preferreds market Banks and utilities are the common issuers of preferreds, and the financial services giants are issuing some very attractive offerings, according to Michael Youngworth, head of global convertibles and preferreds strategy at Bank of America. “Following their earnings, a number of large banks have engaged in refinancing activity within their preferred and hybrid capital stacks,” he wrote in a Feb. 10 note. Goldman Sachs , State Street , JPMorgan and Citi were among the names he called out. “Notably, the banks’ new $1000 par preferreds have priced with hefty coupons, averaging 6.7%,” he said. While preferred securities in the $1,000 par market tend to be the purview of institutional investors, those in the $25 par corner are sold to retail investors. Coupons for $25 par preferreds are typically fixed for the term or “fixed to floating,” which means the rate can adjust after a certain period. Preferreds usually have long maturity dates or are perpetual, but they also tend to have “call dates,” at which point the issuer can redeem the securities. To that end, Youngworth highlighted a slate of $25 par preferreds that made the firm’s “recommended” list in a Feb. 3 note. See below for a few of the names. Fixed-rate offerings that made the cut include an Allstate perpetual preferred that offers a coupon of 7.375% and has a call date of July 15, 2028. A preferred from M & T Bank made the list, as well: It’s perpetual, with a call date of June 15, 2029, and a coupon of 7.5%. The strategist also called out a few $25 par fixed-to-floating rate preferreds, including one from Regions Financial , with a dividend of 6.95%, a call date of Sept. 15, 2029, and a perpetual maturity. “We expect that both interest rates and net issuance trends will continue to drive preferred returns in 2025,” Youngworth wrote in the Feb. 3 note. Investors shopping for individual preferreds should be aware that perpetual securities have greater interest rate sensitivity, which can make their prices volatile. Like bonds, prices on preferreds come down when rates rise. “In our 2025 year-ahead outlook, we also discussed our current preference for shorter-duration $1000 par over $25 par preferreds, though buying opportunities for duration may emerge if yields move meaningfully higher from here,” Youngworth said in his Feb. 10 note. Further, investors buying individual securities will need to watch issuers’ credit ratings. Those with ratings of BBB- or better are deemed investment grade by Standard & Poor’s. Holders of preferred securities rank below bondholders in the event an issuer is liquidated, which brings in another element of risk with these holdings. Making an ETF play Investors seeking broader exposure to preferreds may want to consider buying an exchange traded fund that focuses on these securities. “Retail fund flows imply that investors also still prefer shorter-duration, fixed-to-floating and floating rate preferred structures,” said Youngworth in his Feb. 10 note. To that end, he pointed out that retail flows as of late have been flocking toward the Invesco Variable Rate Preferred ETF (VRP) . In the past month, the fund has gathered nearly $27 million in inflows, according to FactSet. VRP has an expense ratio of 0.5% and a total return of about 10.3% over the past year. Other ETFs in the preferred securities space include the iShares Preferred and Income Securities ETF (PFF) , which has an expense ratio of 0.46% and a total return of roughly 6.5% over the past year, and the First Trust Preferred Securities and Income ETF (FPE) , which has an expense ratio of 0.84% and a one-year total return of about 10.7%.
