Why Bank of America's Floating Preferred Shares with a 4% Floor Present a Strategic Buy for Income-Seeking Investors

In an era of macroeconomic uncertainty and shifting Federal Reserve policy, income-seeking investors are increasingly drawn to instruments that balance yield potential with resilience against rate volatility. Bank of America’s Floating Rate Non-Cumulative Preferred Stock, Series E, emerges as a compelling candidate for such portfolios. With a 4% dividend floor and a structure tied to the 3-month CME Term SOFR, these shares offer a unique combination of downside protection and yield optimization, particularly as the market anticipates potential rate cuts in 2025 [1].

Rate Environment Resilience: The 4% Floor as a Hedge

The defining feature of Series E is its dividend rate floor of 4%, which acts as a buffer against declining interest rates. The dividend is calculated as the greater of (a) the 3-month CME Term SOFR plus 61.161 basis points or (b) 4% [1]. This structure ensures that even if the reference rate (SOFR) dips below 3.388% (4% minus the 61.161 bps spread), the dividend remains anchored at 4%.

This floor becomes particularly valuable in a rate-cutting environment. For instance, if the Federal Reserve reduces rates in 2025—as hinted by recent Bank of America redemptions of fixed-rate preferred shares—the 4% floor would shield investors from dividend erosion. Historical data from similar instruments, such as Series F (CME Term SOFR + 66.161 bps), demonstrates how floating-rate preferred shares adapt to rate hikes while retaining stability during downturns [1].

Yield Optimization: A 5.92% Current Yield in a Low-Yield World

As of the latest available data, Series E trades at a yield of 5.92%, based on a market price of $21.30 per depositary share and a recent dividend of $0.31548 per share [1]. This yield outperforms traditional income instruments like 10-year Treasury bonds (currently yielding ~3.8%) and high-yield corporate bonds (averaging ~5.2%) [2].

The yield’s attractiveness is further amplified by the shares’ non-cumulative nature, which reduces credit risk for the issuer. While this means skipped dividends are not retroactively paid, the 4% floor and quarterly reset mechanism mitigate this risk by ensuring consistent income in most scenarios [1]. For investors prioritizing capital preservation alongside income, the combination of a floor and a current yield above 5% represents a rare value proposition.

Strategic Alignment with Bank of America’s Capital Management

Bank of America’s proactive management of its preferred share portfolio underscores the strategic appeal of Series E. The recent redemption of Series MM—a fixed-to-floating preferred—demonstrates the bank’s focus on optimizing capital costs in anticipation of rate cuts [1]. By retaining floating-rate shares with floors, the bank aligns its capital structure with market expectations, indirectly validating the resilience of these instruments.

Moreover, the bank’s ability to execute large-scale redemptions (e.g., Series MM’s $1,000 per share redemption in January 2025) reflects strong liquidity and financial discipline [1]. This stability reassures investors that the bank can meet obligations even in stressed environments, further enhancing the case for Series E.

Conclusion: A Strategic Buy for Income Portfolios

For income-seeking investors navigating a post-hiking rate environment, Bank of America’s Series E floating preferred shares offer a rare trifecta: a 4% floor for downside protection, a current yield of 5.92%, and alignment with the bank’s capital strategy. As the Federal Reserve’s policy trajectory remains uncertain, these shares provide a hedge against rate volatility while delivering competitive returns.

However, investors should monitor the transition from LIBOR to SOFR, as well as the bank’s broader capital allocation decisions. For now, Series E stands out as a strategic buy for those seeking resilient, high-yield income in a diversified portfolio.

Source:
[1] Preferred Stock | Bank of America Corporation (BAC) [https://investor.bankofamerica.com/fixed-income/preferred-stock]
[2] Bank of America announces preferred stock dividends for August and September 2025 [https://www.investing.com/news/company-news/bank-of-america-announces-preferred-stock-dividends-for-august-september-93CH-4142530]