Preferred Stocks on the Menu — The Hybrid Taco: Part Stock, Part Bond & Loaded With Fine Print
Unbearably Bullish with Donald B. Johns III · Sep 15, 2026 · 22 min
Show Notes
Episode 11 of Taco Tuesday on Unbearably Bullish — what is preferred stock and does "preferred" really mean safer? The hybrid taco — part stock, part bond, and loaded with fine print most investors never read.
The Hybrid Taco—Part Stock, Part Bond and Loaded With Fine Print
What is preferred stock—and does “preferred” really mean safer?
Preferred stocks combine characteristics commonly associated with stocks and bonds. They may offer attractive income and priority over common shares for specified distributions, but they generally remain subordinate to the issuer’s debt and carry risks that a headline dividend rate may not reveal.
In Taco Tuesday Episode #11, Donald Johns explains preferred-stock investing in clear, practical language.
In this episode
- What preferred stock is
- Where preferred shares sit in the capital stack
- Preferred stock versus common stock and bonds
- Why companies issue preferred securities
- Cumulative versus noncumulative dividends
- Fixed-rate, floating-rate and fixed-to-floating preferreds
- Callable and convertible preferred stock
- Liquidation preference and market price
- Dividend rate versus current yield
- How yield to call works
- Interest-rate and call risk
- Credit, liquidity and reinvestment risk
- Potential tax-treatment considerations
- How high yields can become yield traps
- A ten-point preferred-stock research checklist
The $27 Taco Example
Imagine a preferred security with a $25 liquidation preference and a $1.50 annual dividend. The stated dividend rate is 6% based on the $25 preference—but an investor purchasing at $27 receives a current yield of approximately 5.6%.
If the issuer later redeems the shares at $25, the investor realizes a $2-per-share capital loss before accounting for dividends, taxes, costs and holding time.
That is why investors should examine more than the stated dividend rate. Purchase price, call price, call date, credit quality and potential yield to call can all affect the outcome.
The Bull’s Bottom Line
Preferred stocks may provide income, but they can also combine equity risk, credit risk, interest-rate sensitivity, call risk and limited upside.
Never confuse priority with protection.
Never confuse a high yield with a high-quality opportunity.
And never confuse a stated dividend rate with your actual return.
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Episode disclosure
This video is provided solely for general educational and entertainment purposes. Nothing presented constitutes financial, investment, legal, accounting or tax advice; an offer or solicitation to buy or sell any security; or an endorsement or recommendation of any issuer, preferred security, fund or investment strategy. All numerical examples are hypothetical and do not represent expected results. Preferred securities involve risks including dividend suspension or omission, interest-rate risk, call risk, reinvestment risk, credit and default risk, liquidity risk, subordination, market-price volatility and possible loss of principal. Cumulative status does not guarantee that missed dividends will ultimately be paid. Liquidation preference does not guarantee market value or recovery. Yield-to-call calculations rely on assumptions and are not guaranteed returns. Tax treatment varies by security and investor. Review the applicable prospectus and current issuer disclosures, conduct independent research and consult appropriately qualified professionals before making financial decisions. Past performance does not guarantee future results.
