Preferred shares basics: fixed, rate-reset and perpetual
How preferred shares work: fixed vs rate-reset vs perpetual, cumulative vs non-cumulative dividends, call risk and why prices move with interest rates.
- A preferred dividend is set by the share terms, not by company growth.
- Rate-reset shares change their rate on set dates using a benchmark yield plus a fixed spread.
- Cumulative shares owe missed dividends before common holders are paid; non-cumulative shares don’t.
- Call features cap the upside, and long or perpetual terms make prices sensitive to interest rates.
What is a preferred share?
A preferred share sits between a bond and a common share. Holders usually get a stated dividend, paid before any common dividend, and rank ahead of common shareholders if the company is wound up. In exchange, preferred holders typically have no vote in normal circumstances and don’t share in rising profits. If the company doubles its earnings, the preferred dividend usually stays exactly where the terms put it.
Most preferred shares are issued with a par value (often a round figure such as $25) and a dividend rate expressed as a percentage of par. A $25 share with a 5% rate pays $1.25 a year, often as four quarterly payments of $0.3125. Like any dividend, it still has to be declared by the board, and it can be suspended. See what a dividend is for the basics.
Fixed, rate-reset, floating and perpetual: what’s the difference?
The dividend structure is the first thing to read in the share terms. Names vary by issuer and market, but most preferred shares fall into a few families. A share can combine features, for example a perpetual share whose rate resets every five years.
| Structure | How the dividend is set | Main thing to watch |
|---|---|---|
| Fixed-rate perpetual | Same rate indefinitely; no maturity date | Price swings most when interest rates change |
| Fixed-rate with maturity or retraction | Same rate until a set date, when shares are redeemed (or holders can ask for redemption) | Price tends to drift toward par as the date approaches |
| Rate-reset | Fixed for a period (often five years), then reset to a benchmark yield plus a fixed spread | The new rate can be lower than the old one |
| Floating-rate | Adjusts regularly with a short-term benchmark plus a spread | Income falls when short-term rates fall |
How does a rate reset work? A worked example
Suppose a hypothetical preferred share has a $25 par value, an initial rate of 5.00% for five years, and a reset spread of 2.50% over the five-year government bond yield. On the reset date, the new rate is simply the benchmark yield that day plus 2.50%. That rate then holds for the next five years.
| Benchmark yield on reset date | Plus spread | New rate | Annual dividend on $25 par |
|---|---|---|---|
| 1.50% | 2.50% | 4.00% | $1.00 |
| 2.50% | 2.50% | 5.00% | $1.25 |
| 3.50% | 2.50% | 6.00% | $1.50 |
Some rate-reset shares let holders switch into a floating-rate series at each reset date, and the issuer can often redeem the shares at par on that date instead of resetting.
Cumulative vs non-cumulative: what happens if a dividend is skipped?
If the board skips a dividend on a cumulative preferred share, the missed amount becomes an arrear. The company generally must pay all arrears on that series before it pays anything to common shareholders. On a non-cumulative share, a skipped dividend is simply gone.
Take the $1.25-a-year share from above, paid quarterly at $0.3125. If the board skips four quarters on a cumulative series, $1.25 per share is owed before common dividends can resume. On a non-cumulative series, that $1.25 is never owed. Neither feature prevents a suspension; cumulative terms only change who gets paid first afterward. The general risks are covered in dividend cuts.
What is call risk on preferred shares?
Most preferred shares are callable: the issuer can redeem them at a set price (often par) on or after set dates. Issuers tend to use that right when it helps them, typically when they could raise the same money at a lower rate. That means the best outcome for a holder, falling rates and a rising price, is the one most likely to end with the shares being redeemed at par.
A call also matters if you paid more than the call price. Buy a share at $26 with a $25 call price, and a redemption hands back $25: a $1 loss per share, on top of losing the income stream.
Why do preferred share prices move with interest rates?
A fixed payment is worth less when new investments offer more. For a perpetual share, a rough estimate of price is the annual dividend divided by the yield investors currently demand. The hypothetical share below pays a fixed $1.25 a year with no end date. Shares with a maturity date or a near reset date usually move less, because par comes back sooner.
| Yield investors demand | Approximate price ($1.25 ÷ yield) | Change from $25 par |
|---|---|---|
| 4% | $31.25 in theory | +25%, though a $25 call price usually caps it |
| 5% | $25.00 | 0% |
| 6% | $20.83 | −16.7% |
| 7% | $17.86 | −28.6% |
What else to check before comparing preferred shares
- Tax treatment: in Canada, check whether the dividends are designated eligible; see eligible vs non-eligible dividends. In the US, certain preferred dividends need a holding period of more than 90 days within a 181-day window to be qualified; see the holding period rules.
- Ranking: preferred shares rank behind the company’s debt. A struggling issuer pays lenders first.
- Liquidity: some series trade thinly, so the gap between bid and ask prices can be wide.
- Yield on your price: compare the current yield on the price you’d pay, not the rate on par. A 5% rate on $25 par, on a share trading at $20, is a 6.25% current yield ($1.25 ÷ $20).
Frequently asked questions
Are preferred share dividends guaranteed?
What does par value mean for a preferred share?
Can a rate-reset preferred share’s dividend go down?
Why would a company call its preferred shares?
Education, not advice. This site does not recommend, rate or rank any security and does not know your full situation. Check tax details with the CRA or IRS, or a qualified professional. Read the disclaimer.
Primary sources
- IRS — Publication 550, Investment Income and Expenses
- CRA — Line 12000 and 12010: Taxable amount of dividends
Rules checked October 31, 2026. Tax rules and rates change; confirm current details on the official pages above.