Taxable Preferred Securities

Written By
Paul Tracy
Updated July 18, 2021

What are Taxable Preferred Securities?

Taxable preferred securities are typically preferred stocks whose dividends are not tax-exempt.

How Do Taxable Preferred Securities Work?

Preferred securities (usually called "preferred stocks") have characteristics of both stocks and bonds

Like shares of common stock, shares of preferred stock represent an ownership stake in a company. However, as the term "preferred" suggests, preferred stock carries certain advantages. For example, if a company declares bankruptcy, preferred shareholders are second in line to get paid -- after bondholders but before common stockholders. 

Dividends on preferred stocks must also be paid before dividends on common stocks. Dividends paid on common stock are not guaranteed and can fluctuate from quarter to quarter, but preferred shareholders are usually guaranteed a fixed dividend paid on a regular basis. As a result, preferred stocks often act similar to bonds. 

If the dividends paid on preferred stocks are not tax-exempt, then they are taxable preferred securities.

Why Do Taxable Preferred Securities Matter?

Like taxable bonds, taxable preferred securities have higher pre-tax yields than tax-exempt preferred securities. When comparing taxable and tax-exempt securities, it is always important to adjust the yields so you are comparing them on an apples-to-apples basis (known as "taxable equivalent yield").

There are several mutual funds and ETFs that invest in taxable preferred securities.

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Taxable Preferred Securities.
Be the first to ask a question

If you have a question about Taxable Preferred Securities, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Taxable Preferred Securities, then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Taxable Preferred Securities

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms