Charles Schwab's Preferred Stock Series D: A High-Yield Haven in a Rising Rate World?

In an era where central banks have embarked on a synchronized rate-hiking campaign, income-focused investors are scouring the market for securities that can deliver both stability and attractive returns. Charles Schwab's 5.95% Non-Cumulative Perpetual Preferred Stock, Series D (SCHW.PRD), has emerged as a compelling candidate for such portfolios. With a quarterly dividend of $0.3720 per depositary share and a current yield of 5.97%, the stock offers a tempting yield premium over risk-free assets. But as interest rates climb, the question remains: Is this preferred stock a safe harbor for income investors, or does its structure expose it to the turbulence of a shifting monetary environment?

The Allure of High Yield in a Rising Rate World

SCHW.PRD's 5.97% yield is a standout in a market where 10-year Treasury bonds yield just 4.25% and bank savings accounts offer meager returns. For investors seeking to preserve purchasing power while generating income, preferred stocks like SCHW.PRD can serve as a buffer against inflation. The Charles Schwab Corporation (SCHW), the issuer, is a financial titan with $9.93 trillion in client assets and a fortress-like balance sheet. Its robust capital position and diversified revenue streams—spanning wealth management, brokerage, and asset custody—lend credibility to the security of SCHW.PRD's dividend payments.

Moreover, the stock's proximity to its $25 liquidation preference ($24.93 as of July 25, 2025) suggests minimal price volatility. Preferred stocks often trade at discounts or premiums based on interest rate expectations, but SCHW.PRD's narrow discount of -0.28% indicates that the market views its credit risk as negligible. This is further reinforced by Schwab's recent financial performance, including record earnings and a 11.87% average dividend growth rate over three years.

Risks in a Rising Rate Environment

While the high yield is enticing, preferred stocks are not immune to interest rate risk. When rates rise, newly issued preferred shares often come with higher coupons, making older issues like SCHW.PRD less attractive. This dynamic has been evident in SCHW.PRD's recent performance: it underperformed the S&P 500 ETF (SPY) by 14.5 percentage points in the past year and lagged by 14.5 points in the last three months. The stock's underperformance reflects its sensitivity to rate hikes and the broader market's rotation into growth assets.

The non-cumulative nature of its dividends adds another layer of risk. Unlike cumulative preferred stocks, which accumulate unpaid dividends for future payment, SCHW.PRD's investors could face a total loss of quarterly income if Schwab's board decides to suspend payments. While Schwab has maintained a consistent dividend history, there is no guarantee this will continue in a prolonged rate-hiking cycle or economic downturn.

A critical factor is the stock's redemption feature. Schwab can call the shares at $25.00 per depositary share at any time after June 1, 2021. While the company has not done so as of July 2025, regulatory changes—such as shifts in how preferred shares are classified for Tier 1 capital—could trigger an early redemption. Investors must weigh the risk of losing the high yield against the potential for capital gains if the stock is called at a premium.

Strategic Considerations for Income Investors

For income investors, SCHW.PRD's appeal hinges on two key factors: duration risk and credit quality. The stock's perpetual structure means it has no maturity date, making it more sensitive to rate changes than fixed-term bonds. However, Schwab's strong credit profile and the stock's proximity to liquidation value mitigate some of this risk.

In a rising rate environment, preferred stocks can act as a hedge if their yields outpace cash equivalents. For example, a $100,000 investment in SCHW.PRD would generate $597 in annual income, compared to roughly $425 from a 10-year Treasury. However, investors should consider the tax implications: The 5.95% dividend is taxed at preferential rates for individuals (15–20%) and is eligible for a dividends-received deduction for corporate holders.

A diversified approach is essential. While SCHW.PRD's yield is attractive, allocating only a portion of a portfolio to preferred stocks can balance risk. Investors might pair it with high-quality corporate bonds or floating-rate loans to reduce exposure to rate volatility.

Conclusion: A High-Yield Option with Caveats

Charles Schwab's Series D preferred stock offers a compelling yield in a world of low returns, backed by a strong issuer and a structure that minimizes price volatility. However, its non-cumulative dividend feature, redemption risk, and sensitivity to rate hikes make it a better fit for conservative investors with a long-term horizon than for those seeking guaranteed income.

For those willing to accept these risks, SCHW.PRD could serve as a cornerstone of a high-yield strategy. But in a rising rate environment, vigilance is key. Monitor Schwab's capital structure, regulatory developments, and interest rate trends to ensure this preferred stock remains a safe harbor—and not a storm.