Preferred Equity: A Strategic Cornerstone for Income Stability and Yield in 2025

The current market environment presents a compelling case for preferred equity as a core component of income-focused portfolios. Positioned between common stock and senior debt in a company’s capital structure, preferred securities offer a unique blend of yield potential and income stability, particularly in a rising interest rate climate [1]. With the global preferred securities market valued at $1.3 trillion and a growing emphasis on diversification, investors are increasingly turning to this asset class to balance risk and reward [1].

Yield Potential: Outperforming Traditional Fixed Income

Preferred equity has consistently outperformed traditional fixed income instruments in recent years. In 2024, preferred securities delivered a total return of 9.1%, surpassing high-yield bonds and investment-grade corporate bonds [2]. This outperformance stems from their structural advantages: many preferreds feature fixed-to-fixed or fixed-to-floating rate structures, which provide flexibility in varying rate environments. Additionally, their lower-duration profiles reduce sensitivity to interest rate hikes, a critical benefit as central banks navigate post-pandemic economic dynamics [1].

The tax-advantaged nature of preferred dividends further enhances their appeal. For instance, 70% of preferred dividends qualify for the 15% maximum tax rate in the U.S., making them more efficient than ordinary income streams [1]. This tax efficiency, combined with yields averaging 5-7% across sectors like utilities and financials, positions preferred equity as a superior alternative to traditional bonds in 2025 [2].

Income Stability: Sector Resilience and Structural Safeguards

Income stability in preferred equity is underpinned by sector-specific dynamics and structural safeguards. Noncyclical sectors such as utilities and insurance have historically demonstrated robust dividend consistency, even during economic downturns [1]. For example, the Financials sector has benefited from rising interest rates, which boost net interest margins for banks and insurers. However, investors must remain cautious about trade policy risks that could disrupt lending activity and earnings [1].

The Healthcare sector, another preferred equity stronghold, offers resilience during economic volatility. While biotechnology subsectors face weak fundamentals, broader healthcare companies remain insulated from macroeconomic shocks due to inelastic demand for medical services [1]. Similarly, the Communication Services sector’s reliance on subscription-based revenue provides a stable cash flow foundation, though its vulnerability to economic slowdowns and market concentration requires careful scrutiny [1].

Structural features like call protection also enhance income stability. Many preferred securities issued in the over-the-counter (OTC) market include fixed-to-floating rate conversions, reducing the likelihood of early redemption and ensuring long-term yield visibility [1].

Risks and Mitigation Strategies

Despite their advantages, preferred equities are not without risks. Subordination risk—where preferred shareholders rank below bondholders in liquidation—remains a concern. However, dividend deferrals or omissions are rare, particularly for securities issued by financially sound companies in regulated industries [1]. To mitigate these risks, investors should prioritize preferreds with strong credit ratings (e.g., A or higher) and avoid sectors with weak balance sheets, such as struggling biotech firms [1].

Conclusion: A Strategic Allocation for 2025

As the U.S. election year unfolds and interest rate trajectories remain uncertain, preferred equity offers a strategic allocation for investors seeking income stability and yield. Its ability to outperform traditional fixed income, coupled with sector-specific resilience and tax advantages, makes it a versatile tool for navigating macroeconomic uncertainty. By carefully selecting preferreds with strong structural safeguards and sectoral diversification, investors can capitalize on this asset class’s unique value proposition in 2025 and beyond.

Source:[1] Income investing redefined: The case for preferred securities [https://www.cohenandsteers.com/insights/income-investing-redefined-the-case-for-preferred-securities/][2] Navigating 2025: 3 Key insights on preferred securities [https://www.cohenandsteers.com/insights/navigating-2025-3-key-insights-on-preferred-securities/]