Building Resilient Income: High-Conviction Preferred Stock Strategies in 2025's Shifting Landscape

In 2025, the preferred stock market is navigating a unique confluence of macroeconomic forces. Elevated interest rates, sticky inflation, and the lingering uncertainty of U.S. election outcomes have created a landscape where income-focused investors must balance risk and reward with precision. Yet, for those who understand the nuances of this asset class, preferred stocks remain a compelling tool for building a resilient and growing income stream.

The Case for Preferred Stocks in 2025

Preferred stocks, which blend equity and debt characteristics, have outperformed most fixed-income categories in 2024, delivering a total return of 9.1%. This performance was fueled by limited net new supply, strong contingent capital securities, and a resilient U.S. economy. However, 2025 introduces new challenges. The Federal Reserve's cautious approach to rate cuts—projecting two 25-basis-point reductions by year-end—means investors must contend with a higher-for-longer interest rate environment.

The yield advantage of preferred securities has also narrowed. The ICE BofA Fixed Rate Preferred Securities Index currently yields 6.5%, compared to 5.5% for the Bloomberg U.S. Corporate “BBB” Bond Index. While this 100-basis-point spread is lower than historical averages, it still positions preferred stocks as a competitive option for income seekers, especially when paired with tax advantages from qualified dividends.

High-Conviction Sectors: Insurance, Utilities, and Financials

Resilient sectors like insurance, utilities, and financials are prime candidates for high-conviction preferred stock allocations. These industries offer stable cash flows, regulatory tailwinds, and a history of issuing preferred shares to optimize capital structures.

1. Insurance Sector
   Insurance companies often issue preferred shares to maintain flexibility in capital financing. These securities typically offer higher yields than common stocks and are less volatile than corporate bonds. For example, preferred shares from major insurers like Prudential (PFG) and MetLife (MET) have yields exceeding 6% as of July 2025. These issuers benefit from a strong regulatory environment and consistent cash flows, making them ideal for income-focused portfolios.

2. Utilities Sector
   Utilities are another cornerstone for preferred stock strategies. Companies like NextEra Energy (NEE) and Dominion Energy (D) have issued preferred shares with yields around 5.8%, supported by their essential role in the energy transition and stable demand. Utilities' preferred stocks also offer downside protection during economic slowdowns, as their operations are less sensitive to interest rate hikes than cyclical sectors.

3. Financials Sector
   Banks and financial institutions, particularly regional banks, have become more aggressive in issuing preferred shares to bolster capital reserves. For instance, Citigroup (C) and Bank of America (BAC) have preferred offerings with yields near 6.2%. These securities benefit from the sector's strong credit fundamentals and the potential for regulatory relief under new administrations.

Actively Managed ETFs: A Strategic Access Point

For individual investors, accessing high-conviction preferred stocks can be challenging due to the complexity of the market. Actively managed ETFs offer a solution by providing diversified exposure to preferred securities while mitigating risks like negative-yield-to-call features.

• Virtus InfraCap U.S. Preferred Stock ETF (PFFA): With a dividend yield of ~10% as of May 2025, PFFA leverages leverage and options strategies to amplify returns. Its focus on institutional-grade preferreds makes it ideal for investors seeking aggressive income.
• First Trust Preferred Securities Income ETF (FPE): This fund holds preferred shares from mid-cap and large-cap issuers, including Goldman Sachs (GS) and Lloyds Banking Group. Its 5.8% yield and strong credit quality make it a balanced choice for moderate-risk portfolios.
• Nuveen Preferred and Income ETF (NPFI): A newer entrant, NPFI has delivered a 7.44% trailing 12-month total return, driven by its focus on high-conviction, short-duration preferreds.

Navigating Risks in a High-Yield Environment

While preferred stocks offer attractive yields, investors must remain mindful of risks. Price volatility is a concern, as preferred securities are sensitive to rising Treasury yields. For example, a 10-year Treasury yield reaching 5% in 2025 could push the ICE BofA Preferred Index below $92, as seen in previous cycles. Diversification across sectors and maturities is critical to managing this risk.

Additionally, the low ranking of preferred securities in the capital structure means they carry higher credit risk than bonds. Investors should prioritize issuers with strong balance sheets and a history of consistent dividend payments.

Conclusion: A Strategic Approach to Income Generation

In 2025, preferred stocks remain a powerful tool for building a resilient income stream, particularly in sectors like insurance, utilities, and financials. By leveraging actively managed ETFs and high-conviction selections, investors can access a blend of yield, capital preservation, and tax efficiency. However, success requires careful monitoring of macroeconomic signals—such as inflation trends, rate-cutting timelines, and sector-specific dynamics—to ensure a balanced, long-term strategy.

For those willing to navigate the complexities of this asset class, preferred stocks offer a unique opportunity to outperform traditional bonds while adapting to the evolving economic landscape. As the market continues to recalibrate, the key will be to stay informed, diversified, and focused on high-quality, income-generating opportunities.