Dividend yields on preferred stocks have soared. This is how to pick the best ones for your portfolio.

Because the rising interest rates mean falling prices for bonds and preferred stocks. For those income-oriented securities, low prices mean higher yields for investors who buy now and possibly — or even probably — higher capital gains down the road.

This year has been brutal for funds that invest in bonds and preferred stocks. But any income investor must expect securities’ market values to move in the opposite direction of interest rates. These instruments are only appropriate for long-term investors who want income. They are not designed for quick gains.

The Invesco Financial Preferred ETF’s
PGF,
-0.13%
share price is down 20% in 2022. It pays a monthly dividend that has oscillated between 7.1 and 7.2 cents a share over the past year. If we go with the 7.1 cents and the closing price of $15.04 on Sept. 28, the current yield for a new investor is 5.66%. At the end of 2021, based on the closing price of $18.82, the current yield was 4.53%.

So PGF has become a more attractive investment. But you might consider holding your own preferred stocks — you can hold them as long as you like and sell them for a gain or a loss, with the former much more likely after prices for older securities have dropped far below face value — provided you have the discipline to hold on for years.

Below is a set of terms and resources, plus two lists of preferred stocks, to provide examples of ways income-seeking investors can take advantage of the current discounts.

Preferred shares of JPMorgan Chase

For example, JPMorgan Chases’s
JPM,
-1.69%
Preferred Stock Series JJ was issued at a par value of $25 in January 2021, at a dividend rate of 4.55%. At the end of 2021, the closing share price was $26.23, which meant if an investor bought the shares at that price, the current yield would be only 4.34%, and if the preferred stock were redeemed, the investor eventually would book a loss of $1.23 a share.

Fast forward to Sept. 28, and the JPM Series JJ had fallen to $19.02 a share. If you went in at that price, your current yield would be 5.98%, and if the shares were eventually redeemed, your gain would be $5.98 a share.

In a note to clients on Sept. 7, Odeon Capital analyst Richard Bove explained that he has a “hold” rating on JPM’s common shares, but recommends buying the company’s preferred shares.

Preferred stock terms

Before showing you where to get the information, here are some definitions of terms you will need for your own research into preferred stocks.

Any investor can buy preferred stocks. All you need is a brokerage account.

A preferred stock is different from a common stock in that its owner has no voting rights. Preferred stockholders also have preference over common stockholders in the event a company is liquidated. To make it simple, if a company goes bankrupt and is liquidated, bondholders are paid first, then preferred shareholders and then common shareholders.

A company may have several preferred stock issues. Investors buy preferred stocks for dividends, just as they would buy bonds for interest income. Preferred dividends are typically paid quarterly.

Important definitions:

Par — This is the price at which a preferred stock is issued. It is typically $25 but could be $100 or another price. The par value is similar to the face value of a bond. It is what the investor will be paid if the preferred stock is redeemed by the issuing company. Just as bonds’ market values fluctuate, preferred share prices fluctuate, typically in the opposite direction of interest rates in the economy. In the current environment, with interest rates rising, many preferred stocks are trading at discounts to par.

Premium/discount  — The difference between a preferred stock’s current price and the par value.

Coupon — A preferred stock’s stated yield, based on the par value. This is typically a fixed rate, but many large issuers have fixed-to-floating-rate preferred stocks, which might be well-positioned in the current environment. In the lists below we stick with fixed-rate preferreds, for simplicity. A fixed coupon will be included in the preferred issue’s name.

Dividend rate — The stated yield multiplied by the par value. JPMorgan Chase’s Preferred Stock Series JJ was issued on March 10, 2021, at a par value of $25 with a 4.55% coupon. The annual dividend is $1.1375.

Current yield — The annual dividend rate divided by the current market price. JPMorgan Chase’s Preferred Stock Series JJ closed at $19.02 on Sept. 28. That made for a current yield of 5.98%.

Qualified dividends — These are dividends that for U.S. investors are taxed at rates below their regular income-tax rates. For example, a married couple’s federal income tax on qualified dividends zero if their annual income is $83,350 or less, and the rate is 15% if their income is $517,200 or less.

Call date — The date when the issuer may decide whether to redeem the preferred stock. The issuer can redeem some or all of that preferred series any time beginning on this date. If interest rates are significantly lower than they were when the preferred stock was issued, the issuer is likely to redeem. In the current environment, with interest rates having risen so quickly, redemptions are unlikely. But investors who take advantage of today’s discounts will have something to look forward to as they enjoy the high income — the U.S. economy won’t be growing at an accelerated pace forever. Eventually interest rates will come down again and then preferred-stock prices will move up significantly.

Maturity date — The date when the preferred series will be completely redeemed. These days, most preferred stocks are “perpetual,” which means there is no maturity date, although there is typically a call date. JPMorgan Chase’s Preferred Stock Series JJ is a perpetual preferred with a June 1, 2026, call date.

Cumulative/non-cumulative — A preferred-stock issuer might be forced to suspend its dividends on one or more preferred series if it is in financial trouble. If a preferred stock is cumulative, suspended dividends will accrue in arrears to be paid later when (or if) the dividend is restored. Banks and insurers issue noncumulative preferred stock because regulators want them to have the flexibility of suspending dividends and never making up for them, in the event of severe financial or economic distress. It is very rare for an investment-grade issuer to miss a preferred-stock dividend payment.

Credit Rating — Preferred stocks have credit ratings, just as bonds do. Some are unrated. In the two lists below, all the issues have investment-grade ratings from Moody’s and/or Standard & Poor’s. Fidelity breaks down the agencies’ ratings hierarchy.

Where to look for preferred stocks

Your broker of investment adviser will have lists or tools available to help you select preferred stocks. But you can also look them up on your own. The purpose of this discussion is not to recommend that you buy preferred stocks, or any in particular, but to show you how to get the information if you wish to do your own research in an area of income investing that isn’t widely covered.

QuantumOnline is a free resource for investors (who support it with donations), that lists exchange-traded income securities, including preferred stocks. For each security, it includes links to the prospectus, a dividend payment schedule and much more information. The prospectus will dig deeply into the credit aspects of a preferred series — a company with several will have a pecking order among the preferred issues if it is liquidated.

One easy way to begin is to click “income tables,” and then select a list. If you choose “All-Exchange-Traded Income Securities,” the list will include all preferred stocks, as well as other securities not covered here, including exchange traded bonds, known as “baby bonds,” which trade in units with par values that are likely to be $25.

To narrow the list, you can select “All Preferred Stocks,” or you can go further, selecting “preferreds eligible for the 15% tax rate,” which we have done for this article.

QuantumOnline warns that there is no guarantee the table correctly predicts which companies’ preferred dividends will be considered “qualified dividends” (defined above). One reason is that if a company has an unprofitable year and pays no federal income taxes, its preferred dividends may not be considered “qualified” that year by the Internal Revenue Service.

So this is a best-effort approach to identifying 469 preferred stocks that pay qualified dividends.

Preferred examples — seven issuers

Here is a selection of seven preferred stocks expected to pay qualified dividends, all of which are traded on the New York Stock Exchange. The list includes possible capital gains on redemption, based on par and current share prices. It also includes hypothetical returns to call dates.

All of these stocks have investment-grade ratings and $25 par values, so that data isn’t included. All dividends are noncumulative and none of these preferreds have maturity dates. So the names of the issues have been shortened to fit in the table.

Here they are, sorted by current dividend yield:

Preferred stock	NYSE Ticker	Coupon	Call date	Sept. 28 price	Current yield	Capital gain if called	Return if called on call date	Annualized return if called on call date
Morgan Stanley 6.50% Series P	MS-P	6.500%	10/15/2027	$25.20	6.45%	-$0.20	31.77%	6.29%
JPMorgan Chase & Co. 4.55% Series JJ	JPM-K	4.550%	6/1/2026	$19.02	5.98%	$5.98	53.43%	14.53%
Charles Schwab Corp. 4.45% Series J	SCHW-J	4.450%	6/1/2026	$18.63	5.97%	$6.37	56.15%	15.27%
KeyCorp 5.65% Series F	KEY-J	5.650%	12/15/2023	$23.71	5.96%	$1.29	12.67%	10.44%
Allstate Corp. 4.750% Series I	All-I	4.750%	1/15/2025	$20.03	5.93%	$4.97	38.46%	16.71%
Cullen/Frost Bankers Inc. 4.45% Series B	CFR-B	4.450%	12/15/2025	$18.83	5.91%	$6.17	51.77%	16.10%
MetLife 5.625% Series E	MET-E	5.625%	6/15/2023	$23.88	5.89%	$1.12	8.88%	12.47%
Sources: QuantumOnline, New York Stock Exchange

Some notes about the data:

• The tickers in the list are the ones used by the New York Stock Exchange. Your broker may have a slightly different ticker format for preferreds.

• The “capital gain if called” is a fixed figure, as these preferred stocks would be redeemed at par.

• The “return if called on call date” and the “annualized return if called on call date” are hypothetical. After we reach the call date, a company may decide at any time to call. That decision will be based in part on whether current interest rates are higher than they were when the preferred stock was issued. That said, some of these issues have call dates far enough out that it is possible interest rates will be considerably lower than they are now. These calculations are based on the number of calendar days until the call date adjusted for the 360-day year followed for quarterly dividend payments.

• The Morgan Stanley
  MS,
  -1.98%
  6.50% Series P tops the list with the highest current yield, but that is 6.45% — below the coupon — because the shares are trading at a premium to par. Investors who want the highest current yields for recently issued investment-grade preferred stocks are more likely to pay a premium.

• The Cullen/Frost Bankers Inc.
  CFR,
  -0.81%
  4.45% Series B trades at the greatest discount on this first list — $6.17, for a 33% gain if and when the shares are redeemed. Charles Schwab Corp.
  SCHW,
  -0.83%
  4.45% Series J is also heavily discounted. Meanwhile, the current yields of both issues for new investor aren’t bad when compared with the yield of 3.38% for 10-year U.S. Treasury notes
  TMUBMUSD10Y,
  3.787%.

• The MetLife
  MET,
  -1.28%
  5.625% Series E preferred shares trade at a relatively small discount because of their relatively high coupon. The call date is the soonest on the list — June 15, 2023.

Seven more from one issuer

It can be interesting to flip through the preferred series of one issuer. JPMorgan Chase has 11 preferred issues.

Here are First Republic Bank’s
FRC,
-2.34%
seven preferred issues, all of which have investment-grade ratings from Moody’s and Standard & Poor’s. The preferred stocks are sorted by current yield:

The Series M shares have no call date. They also have a low coupon, which means interest rates would have to be low indeed for them to be redeemed.

This illustrates the risk relationship between the coupon and the market value. Generally speaking, the lower the coupon, the greater the discount. But if you are looking to book gains, don’t expect calls at par. It might make more sense to be less greedy and book gains by selling at prices below par, but higher than what you have paid.

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