Brighthouse Financial's Preferred Stock Dividend Strategy: A High-Yield Opportunity in a Low-Yield World

In a world where traditional fixed-income assets struggle to deliver meaningful returns, Brighthouse Financial's (BHF) non-cumulative preferred stock offerings have emerged as a compelling option for income-focused investors. With the U.S. 10-year Treasury yield hovering near 4.2% as of August 2025 and corporate bond yields offering marginal improvements, Brighthouse's preferred shares—such as the 6.75% Series B (BHFAO) and 6.60% Series A (BHFAP)—stand out with yields exceeding 9% for certain series. This article evaluates the sustainability of Brighthouse's dividend strategy, the value proposition of its preferred shares, and the risks inherent in a low-yield market environment.

The Mechanics of Brighthouse's Preferred Stock Dividend Strategy

Brighthouse has issued four series of non-cumulative preferred stock (A, B, C, D) since 2020, each with distinct dividend rates and terms. For example, the Series B preferred stock (BHFAO) pays a quarterly dividend of $0.421875 per depositary share, translating to an annualized yield of 6.75% on its $25 liquidation preference. As of June 2025, BHFAO traded at $17.44, a 30.24% discount to par, pushing its current yield to 9.68%. This discount reflects market skepticism about the sustainability of the dividend, but it also creates a margin of safety for investors.

The non-cumulative nature of these shares means that missed dividends are not owed in the future, a critical distinction from cumulative preferreds. While this reduces downside risk for the company, it introduces uncertainty for investors. Brighthouse's Q1 2025 results, however, suggest a strong capital position: a risk-based capital (RBC) ratio of 420–440%, $5.5 billion in total adjusted capital, and $1.0 billion in holding company liquidity. These metrics indicate the company has ample resources to maintain its dividend commitments, even amid market volatility.

Value Proposition in a Low-Yield Environment

Preferred stocks have historically outperformed in low-yield environments due to their hybrid characteristics—offering equity-like upside with bond-like income. In 2024, the ICE BofA Fixed Rate Preferred Securities Index returned 9.1%, outperforming Treasuries and investment-grade bonds. Brighthouse's preferred shares align with this trend, particularly for investors seeking tax-advantaged income. Qualified dividends on preferreds are taxed at lower rates than ordinary income in many jurisdictions, enhancing after-tax returns.

The current discounts on Brighthouse's preferred shares also present an opportunity for capital appreciation. For instance, BHFAO's 30% discount implies a potential 75% total return if the shares trade to par. However, this scenario depends on the company's ability to maintain its dividend policy and the broader market's appetite for preferreds.

Risks and Market Dynamics

Despite the allure, investors must weigh several risks. First, preferred stocks are subordinated to bonds in the capital structure, making them more vulnerable during financial distress. Brighthouse's Q1 2025 net loss of $294 million, though offset by adjusted earnings of $245 million, highlights the volatility of its earnings. Second, preferred shares are sensitive to interest rate changes. A rise in Treasury yields—potentially driven by inflation or policy shifts—could pressure prices, especially for perpetual issues like BHFAO.

The low-yield environment also drives investors to reach for yield, increasing demand for preferreds but potentially inflating valuations. Brighthouse's share repurchase program ($102 million year-to-date in 2025) signals management's confidence in its capital structure, but it could also reduce the supply of common stock, indirectly affecting preferred share dynamics.

Strategic Considerations for Income Investors

For investors considering Brighthouse's preferred shares, the key is balancing yield with risk. The non-cumulative structure limits downside but requires confidence in the company's financial resilience. Brighthouse's diversified investment portfolio—$124 billion in assets, with 97% investment-grade fixed-income holdings—supports this confidence. Additionally, its commercial mortgage loan portfolio (11% of total investments) has strong credit metrics, including a 2.3x debt service coverage ratio.

Investors should also monitor the company's redemption policies. Series B (BHFAO) is callable on June 25, 2025, meaning Brighthouse could redeem the shares at par if it becomes advantageous. While this could limit capital appreciation, it also ensures investors receive par value if the company chooses to call the shares.

Conclusion: A High-Yield Bet with Caveats

Brighthouse Financial's preferred stock strategy offers a compelling value proposition in a low-yield world, particularly for investors seeking income and capital appreciation. The current discounts on shares like BHFAO create a margin of safety, while the company's robust capital position supports dividend sustainability. However, the non-cumulative nature of the shares and interest rate sensitivity necessitate a cautious approach.

For income investors, Brighthouse's preferreds are best suited for diversified portfolios that can tolerate moderate volatility. Those with a higher risk tolerance may find the 9.68% yield on BHFAO attractive, but they should also consider hedging against interest rate risks or pairing these shares with higher-quality bonds. Ultimately, Brighthouse's preferred stock strategy reflects a nuanced balance between yield generation and capital preservation—a rare combination in today's market.