The Complete Guide Investors Need to Understand Behind the Sharp Drop in US Preferred Stocks

Why Are US Preferred Stocks Underperforming Right Now?

In recent years, the US preferred stock market has performed disappointingly, with the preferred ETF (PFF) continuously declining since September 2022, and as of August 1, 2023, its return has fallen to -15.16%. This sharp decline in US preferred stocks reflects the profound impact of global economic uncertainty, trade tensions, and slowing US economic growth on corporate earnings. The high interest rate environment has further suppressed the attractiveness of preferred stocks, leading investors to shift towards other investment tools.

What Exactly Are Preferred Stocks?

Preferred stocks are a unique investment instrument that combines features of stocks and bonds, offering advantages of both. US preferred stocks refer to such stocks issued on US stock exchanges. Due to their special rights structure, listed companies can issue various types of preferred stocks as needed. Currently, there are over 1,000 US preferred stocks in the market.

Compared to common stocks, preferred stocks have several core advantages:

• Priority Dividend Rights: Companies pay dividends to preferred shareholders before common shareholders
• Fixed Income Guarantee: Preferred stocks have fixed dividend rates, with less volatility than common stocks
• Bankruptcy Priority Protection: In liquidation, preferred shareholders have priority over common shareholders in asset distribution and repayment
• Limited Voting Rights: Preferred shareholders usually have no voting rights or have voting rights that are strictly limited

These features make preferred stocks similar to bonds in terms of low risk, while offering higher yields than bonds. Their income mainly comes from fixed dividends rather than stock price appreciation.

The Three Main Types of US Preferred Stocks

There are five basic types of preferred stocks in the market, with three being the most common:

Cumulative Preferred Stock
Dividends are cumulative; if the company cannot pay on time, unpaid dividends are carried forward to subsequent years until fully paid. Companies such as Goldman Sachs, Sony, and Southwest Airlines issue this type.

Callable Preferred Stock
The issuing company has the right (but not the obligation) to redeem the preferred stock at a specified price after a certain date. Common among companies like Nike, Coca-Cola, and McDonald’s.

Convertible Preferred Stock
Holders can convert their preferred shares into common stock at a predetermined time, price, and ratio, offering greater flexibility. Amazon, Facebook, and Microsoft have issued this type.

Fundamental Differences Between US and Taiwanese Preferred Stocks

Quantity and Industry Distribution
US preferred stocks exceed 1,000 issues across various industries, while Taiwan has fewer than 20, mainly concentrated in financial stocks. In terms of liquidity, the US market is higher, whereas Taiwan’s is relatively lower.

Returns and Dividends
US preferred stocks have an annual yield of about 6%–8%, while Taiwan’s preferred stocks offer around 3%–4%. Regarding dividend frequency, US preferred stocks pay quarterly, whereas Taiwanese preferred stocks typically pay annually.

Tax Treatment
Most traditional US preferred stocks are subject to a 30% withholding tax, with some enjoying tax exemption. Taiwanese preferred stocks are taxed as regular dividend income.

Investment Performance Revealed by Historical Data

By comparing the performance of four tracking ETFs over the past 10 and 5 years, the actual results of preferred stock investments become clear:

Since 2012, only high-dividend ETFs (SCHD) and the S&P 500 ETF (SPY) have maintained a steady upward trend, while preferred stock ETFs (PFF) and high-yield bond ETFs (HYG) have fluctuated within a range of 0 to -15%, showing mediocre performance.

Data from the past five years is even more telling: high-dividend stocks and the S&P 500 have returned over 100%, reaching 202.76% and 275.21%, respectively. In contrast, preferred stock ETFs and high-yield bond ETFs have not exceeded 9% in the past five years, and since September 2022, they have even entered negative territory.

This gap reflects that, under the current economic environment, US preferred stocks have become a declining trend, performing far below market expectations.

Is Investing in US Preferred Stocks Wise Right Now?

Although past performance has been less than ideal, the current situation requires specific analysis. The high-interest-rate environment and economic recession uncertainties have made preferred stocks attractive again to some investors—because, comparatively, common stocks face greater volatility risks.

However, investment decisions must be based on individual risk tolerance, investment horizon, and overall asset allocation. Blindly following trends can only increase the risk of losses.

What Hidden Risks Do US Preferred Stocks Carry?

Dividend Suspension Risk
While preferred stock dividends are usually higher, if the company’s performance deteriorates, dividends may be reduced or suspended. During economic downturns, many companies choose to freeze preferred dividends.

Lower Bankruptcy Priority
In liquidation, preferred stockholders rank behind creditors and other preferred shareholders. This means that in worst-case scenarios, preferred investors may not recover their principal.

Liquidity Challenges
Preferred stocks tend to have lower trading volumes, and large buy or sell orders can lead to wide bid-ask spreads, increasing transaction costs.

Interest Rate Sensitivity
In a high-interest-rate environment, the fixed dividends of preferred stocks become less attractive. When central banks raise interest rates, market rates rise, prompting investors to sell preferred stocks and shift to other assets, which can drive down their prices.

How to Purchase US Preferred Stocks?

Taiwanese investors can access preferred stocks through two main channels:

Overseas Discretionary Trusts
Purchasing via banks or brokerage firms through agents, which is convenient but involves higher handling fees.

Direct Accounts with Overseas Brokers
Such as Interactive Brokers, Futu Securities, etc., which offer US stock trading services. Fee structures vary; some charge no commission, others charge standard fees.

Opening accounts with overseas brokers is generally straightforward and quick, usually requiring three steps: filling out personal information, identity verification, and depositing funds. When choosing a broker, compare fees, deposit/withdrawal convenience, and trading tools.

Summary: Rational Approach to the US Preferred Stock Decline

Although the sharp decline in US preferred stocks is discouraging, it does not necessarily negate the value of this investment instrument. Preferred stocks still offer unique benefits—providing relatively stable cash flow and lower risk compared to common stocks. The key is to recognize their limitations accurately and make decisions based on personal circumstances, rather than blindly chasing high yields. In the current environment of high interest rates and economic uncertainty, preferred stocks can serve as a conservative component of a diversified portfolio, but should not constitute a major holding.