Preferred stocks can be a practical tool for traders who want steady income without giving up all the flexibility that comes with trading equities. They sit between common shares and bonds, offering a mix of fixed-income features with some upside potential. While I focus on short-term trades, understanding how preferred shares function helps traders recognize opportunity in different market conditions.
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Read this article because it breaks down exactly how to find preferred stocks in a clear, actionable 7-step process that helps you evaluate dividends, credit ratings, and sector diversification with confidence.
I’ll answer the following questions:
- What are the most important steps to take when searching for preferred stocks?
- How can I use a stock screener to filter for preferred shares?
- What role do credit ratings play in evaluating preferred stocks?
- How do I compare dividend yields across different preferred stocks?
- Why is it important to check call dates and terms before investing?
- Where can I buy preferred stocks as an individual investor?
- How can preferred stocks be used to generate consistent income?
- What are the tax implications of owning preferred stocks?
Let’s get to the content!
1. Define Your Investment Goals
The first step to finding preferred stocks is understanding what you want to get out of them. Preferred shares aren’t built for fast capital appreciation like small-cap momentum stocks. Instead, they’re designed to generate steady income through dividends, with a known rate of return and less price volatility. That makes them a better fit for traders looking to stabilize their portfolio or park capital in something more reliable during sideways markets.
Ask yourself what role preferreds will play in your overall strategy. Are you targeting steady yield to offset risk in growth assets? Are you using them as a short-term holding for safety during earnings season or high volatility? Your answers will shape how you filter for characteristics like yield, credit ratings, and call dates. Over the years, I’ve seen traders get into trouble when they chase yield without thinking through why they’re buying in the first place. Have a plan, or the market will make one for you.
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2. Use Preferred Stock Screeners
A preferred stock screener helps you cut through thousands of listings to find a list that fits your needs. You can filter by dividend yield, callability, credit rating, industry sector, and price-to-par value. Most of the bigger data platforms like QuantumOnline, MarketWatch, or Finviz offer screeners with preferred stock categories. But not all screeners are equal, and you need to cross-check the data against company filings and current market rates.
Start by sorting for yield ranges that match your income targets. Then layer in factors like callable status, industry type, and credit ratings. A trader should be able to spot patterns fast, like which sectors tend to offer higher yields or which issuers regularly offer new preferreds. In my trading classes, I stress using data to support every move you make. Blindly trusting the screener without verifying the information is like entering a trade based on a headline without checking the chart.
3. Research Individual Companies
Before buying any preferred shares, research the issuing company. Unlike common stocks, preferreds don’t offer voting rights or ownership control, so you’re putting your trust in the company’s financial stability. Look into their earnings reports, debt load, free cash flow, and history of dividend payments. These are all signals of whether they can sustain payments and return your capital if the stock is called.
Focus on the issuer’s business model. Is this a growth firm with unpredictable cash flow, or a utility with steady earnings? Preferred shares are often used by companies that want to raise capital without giving up equity, which is fine if the organization is healthy. But if a business is struggling, preferred shareholders are one of the first groups to feel the heat. I always tell traders: risk isn’t just in the price action—it’s in the fundamentals behind the ticker. Make sure you know who you’re getting in bed with.
4. Evaluate Credit Ratings
Credit ratings from agencies like Moody’s, S&P, and Fitch can give you a quick read on the company’s financial strength. For preferred stocks, these ratings help traders assess how likely the issuer is to keep paying dividends and return capital at maturity or call date. A higher rating usually means lower yield, but lower risk. Lower-rated or unrated shares offer more yield, but carry higher risk of default or suspended payments.
Pay attention to recent downgrades. If a company just got cut from investment grade to junk, that’s not just a technical change—it’s a warning. Even if the stock is trading above par or the dividend yield looks attractive, the underlying risk may outweigh the return. In my years of trading, I’ve seen plenty of “safe” preferreds implode because traders ignored a ratings warning. Credit ratings aren’t perfect, but they’re another layer of analysis that can protect your capital.
5. Compare Dividend Yields
The dividend yield is the headline number most people focus on, but you need to look deeper. A high yield can mean strong income, but it can also signal that the market sees problems with the issuer. You want to compare yields not just across similar preferreds, but also to corporate bonds, Treasury rates, and common stock dividends in the same sector. It’s not just about finding the highest number—it’s about finding the best value for the risk.
Look at whether the dividend is cumulative or non-cumulative. Cumulative preferreds must pay any missed dividends before resuming common stock payouts, which gives you more protection as a shareholder. I teach traders to think in terms of edge. Yield is only one part of the setup. The better your entry and the stronger the terms, the more control you have in uncertain markets.
6. Check Call Dates and Terms
Every preferred stock comes with terms set by the issuer, and the call date is one of the most important. This is the date when the company can choose to redeem the stock, usually at par value. If the market price is above par and the stock is called, you lose that upside. On the other hand, if the call price is higher than current market value, there may be opportunity for a short-term return.
Understand the fine print. Some preferreds are perpetual, meaning they have no maturity and may never be called. Others have set call schedules or even mandatory conversion clauses. This matters for traders because you don’t want to be sitting on a stock you think has long-term potential only to have it pulled from you in three months. I’ve always taught that timing is a critical part of every trade. Terms control timing. Know the game before you step onto the field.
7. Diversify Across Sectors
Diversifying your preferred stock holdings across sectors can reduce portfolio risk and balance out income across different types of business cycles. Just like in common stock trading, you don’t want all your capital tied up in one industry, especially in a market where sector rotation is common. Financials, real estate, utilities, and energy are common issuers of preferred shares, and each sector has its own set of earnings drivers, interest rate sensitivity, and credit exposure.
If all your preferreds are tied to banks, for example, a single regulatory shift or credit event could wreck your income stream. Spread your assets across multiple sectors and compare yields, terms, and credit ratings within each one. In trading, I look at setups across industries because strength moves in waves. Preferred stock performance works the same way. Sector exposure gives you a way to stay in the trade while minimizing concentrated risk.
Where to Buy Preferred Stocks
You can buy preferred stocks through most major brokers, including platforms like Fidelity, Schwab, and E*TRADE. They trade on exchanges like the NYSE and Nasdaq, just like common shares. Some preferreds are listed under ticker symbols, while others are available only through OTC markets, which may have lower liquidity and wider spreads.
Check the order execution type. Some preferreds don’t trade often, which means limit orders are a better strategy than market orders. You don’t want to chase price or get caught in an illiquid trade with a poor entry. Over the years, I’ve seen traders treat preferreds like penny stocks—jumping in and out with no thought to liquidity or price levels. These aren’t fast movers. Treat them with the respect you give to any other asset in your portfolio.
Benefits and Risks of Preferred Stocks
Preferred stocks can play a useful role in a trading plan, especially for those looking to balance income generation with capital preservation. These shares often appeal to investors who want more predictable returns than common stocks typically offer, without locking their money into traditional fixed-income investments. For active traders, preferreds can also serve as a place to park capital during slower periods, while still producing cash flow. In some situations, they offer a middle ground between growth-focused stocks and interest-bearing assets. The key is understanding the specific characteristics of each issue and knowing how they align with your overall trading goals.
That said, preferreds are not a perfect fit for every investor or strategy. Stockholders of preferred shares have limited control and may be exposed to risks tied to the issuer’s financial condition, market interest rates, and liquidity. Not all preferred stocks react the same way to changes in economic policy, and some may be more sensitive to credit conditions than others. I’ve taught traders to always analyze real-world examples and track historical behavior of similar assets when considering any new trade. Relying on headlines or blanket recommendations from generic advisors can lead to missed details that affect your outcome. Whether you’re investing for income or adding stability to your positions, use reliable sources, stay informed, and make sure your decisions are backed by solid analysis—not assumptions.
Advantages
Preferred stocks offer a steady income stream through fixed dividends, making them attractive for traders who want predictable returns without the full exposure of common equity. They rank higher than common stock in the capital structure, so if a company runs into trouble, preferred shareholders get paid before equity holders. This priority can be a buffer during economic slowdowns or business downturns.
Many preferred shares also come with features like cumulative dividends or convertibility into common shares. This flexibility can give you multiple ways to profit depending on the market conditions. I always remind my trading students that you don’t need to gamble to get consistent results. Preferreds can offer an edge for disciplined traders looking for income with defined risk and upside options.
Disadvantages
Preferred stocks don’t come with voting rights, which limits your control as a shareholder. They also tend to have lower liquidity than common stocks, which can make exiting a position more difficult. Prices can be sensitive to interest rate changes, especially when yields rise and fixed income becomes more competitive.
There’s also the risk of suspension or non-payment of dividends, especially in weaker companies or during economic shocks. In my trading career, I’ve seen some preferreds fall apart when traders ignored the balance sheet and chased the yield. No matter how attractive the return looks, always measure it against the risk. There’s no free lunch in this business.
How to Use Preferred Stocks as an Income Source
You can use preferred stocks to generate reliable income as part of a trading strategy focused on yield rather than price movement. This approach works well in sideways or bearish markets where capital appreciation is harder to come by. The key is selecting shares with strong credit ratings, reasonable call protection, and a history of uninterrupted payments.
For active traders, preferreds can also serve as a place to park capital between setups. Instead of letting cash sit idle, you can earn returns while waiting for higher-probability trades. I teach this concept a lot—maximize every dollar in your portfolio by using assets that work even when you’re not actively trading them. Preferreds give you that flexibility.
Tax Considerations for Preferred Stocks
Preferred stock dividends are often taxed differently than common stock dividends, depending on how the shares are structured. Qualified dividends may be taxed at a lower rate, but some preferreds pay interest-like income that gets taxed as ordinary income. It’s important to check the tax treatment for each specific issue before buying.
Some preferreds are issued by REITs or foreign firms, which can carry different tax implications. Consult a tax advisor if you’re unsure. I’ve always said: you don’t keep what you earn—you keep what you net. Make sure your tax strategy supports your income goals so you’re not giving back more than necessary at the end of the year.
Key Takeaways
- Preferred stocks can offer a consistent income stream with lower volatility than common shares, but they come with their own set of risks.
- To find the right preferreds, define your goals, use screeners, research the issuer, check ratings, compare yields, review terms, and diversify across sectors.
- Focus on credit quality, tax treatment, and liquidity to build a list of shares that match your strategy.
- Whether you’re using them for steady income or as a temporary capital hold, preferreds can be a tool—not a magic solution.
This is a market tailor-made for traders who are prepared. Preferred stocks thrive on volatility, but it’s up to you to capitalize on it. Stick to your plan, manage your risk, and don’t let FOMO drive your decisions.
These opportunities are fast and unpredictable, but with the right strategy, you can make them work for you.
If you want to know what I’m looking for—check out my free webinar here!
Frequently Asked Questions
Are Preferred Stocks Safer Than Common Stocks?
Preferred stocks are generally less volatile than common shares and rank higher in the capital structure, which means they carry lower risk in bankruptcy situations. However, that doesn’t make them completely safe. Credit risk, dividend suspension, and interest rate sensitivity still apply. Safety depends on the issuer’s financial strength, not just the asset type.
Is It Possible to Lose Money on Preferred Stocks?
Yes, it’s absolutely possible. Prices can fall due to credit downgrades, missed dividend payments, or rising interest rates. Even if a preferred stock offers high yield, that doesn’t guarantee positive return. Traders need to monitor both the market price and the financial health of the issuing company to avoid losses.
Do Preferred Stocks Protect Against Inflation?
Preferred stocks don’t typically offer strong protection against inflation. Most pay fixed dividends, which lose value as inflation rises. Some floating-rate preferreds adjust with interest rates, but even those may lag behind actual inflation. If inflation hedging is your goal, preferreds should be paired with other assets that respond better to rate changes.