For all the hemming and hawing about the state of the bond market this, including the decreasing likelihood of the Federal Reserve cutting interest rates, some fixed income segments are performing.
That group includes preferred stocks. Using the VanEck Preferred Securities ex Financials ETF (PFXF), a $2.43 billion ETF, as the bogey, confirmation of preferreds’ 2026 durability is tangible. The VanEck ETF, one of the largest in the category is higher by 8.36% year-to-date and that’s without the benefit interest rate cuts – something to chew on because preferreds are a rate-sensitive asset class.
PFXF sports a tempting 30-day SEC yield of 6.18% and the yields available on preferred stocks are also worth considering. Somewhat quietly, yields on preferred stocks recently rose, meaning prices declined, faster than 10-year Treasury yields. Today’s somewhat elevated yields on preferred could signal opportunity with an asset class that offers clients both income and tax advantages.
Undeniable Income Allure Without Significant Risk
As the aforementioned PFXF confirms, there’s a clear income case with preferred stocks. Alone, that’s compelling at a time when advisors are realizing traditional, passive aggregate bond funds are long on rate risk while not serving many clients’ income needs.
Something to remember about preferred stocks is that these hybrid securities are issued by corporations, essentially making them another form of corporate debt. But there are advantages relative to traditional corporate bonds, including the point that preferreds usually carry higher yields than investment-grade corporates while offering clients lower risk profiles than standard junk bonds.
“Preferred securities tend to offer higher yields than investment-grade corporates, and recently that advantage has been widening,” notes Collin Martin of Charles Schwab. “The average yield of the preferred security index has risen from just 5.3% in September of 2025 to 6.6% in early May, a more than 100-basis-point increase (a basis point is a unit of measurement equal to 1/100th of one percent, or 0.01%). It rose as high as 7.1% in late March following the increase in Treasury yields (which move inversely to Treasury bond prices) and stock market volatility following the start of the conflict in the Middle East.”
As Martin notes, the average yield on a major junk bond index is near three-year lows while the average preferred yield is 100 basis points above the three-year low and that’s with preferred offering higher credit quality.
Preferred Tax Perks
As advisors know, municipal bonds are fertile territory for the union of fixed income and tax advantages, but those bonds don’t have a monopoly on the tax-advantaged label.
Though not the case across the entirety of the preferred stock landscape, many of these issues pay qualified dividends, which receive favorable tax treatment relative to traditional dividends, meaning clients’ after-tax yields on the right preferred stocks trend higher.
“Qualified dividends are generally taxed at 0%, 15%, or 20% rates, depending on income limits,” adds Martin. “Those lower rates can be an advantage for investors in high tax brackets because the income payments from most taxable bond investments are taxed at income tax rates.”
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