5 ways to strengthen fixed income portfolios with preferred securities

Preferred securities can improve fixed-income portfolios by enhancing income and diversification without requiring materially more duration or lower credit quality.

• A 10-year analysis through September 30, 2026, found that replacing 20% of core, core+ or multisector bond allocations with preferreds increased annualized returns and after-tax yields while keeping volatility broadly comparable.
• For U.S. investors in the highest tax bracket, preferred distributions qualifying as qualified dividend income are taxed at 20% plus the 3.8% Medicare surcharge, versus a total 40.8% rate on interest income.
• Preferreds can substitute for part of a high-yield allocation because their mostly investment-grade issuers offer yields comparable to below-investment-grade bonds, with investors compensated mainly for subordination and structural complexity.
• Compared with private credit, preferreds provide exposure mainly to large, publicly traded companies, with daily pricing and continuous liquidity; software represents roughly 30% of private-credit deal value, while the 50 largest public preferred issuers average $24 billion in annual revenue.
• Short-duration preferreds can bridge cash and intermediate fixed income through resetting coupons, and currently offer roughly 300 basis points more after-tax income than cash, although they have historically been more volatile.

Takeaway: Investors may use preferreds as a complement or partial substitute for multisector bonds, municipals, high yield, private credit and excess cash, but the higher income comes with structural, credit and volatility risks.