Preferred dividends rarely make headlines, but for investors seeking steady income and a buffer against market volatility, they’re an essential tool. As Australia’s economic landscape shifts in 2025—with interest rates stabilising and regulatory tweaks on the horizon—understanding how preferred dividends work, and their place in your portfolio, is more important than ever.
What Are Preferred Dividends?
Preferred dividends are payments made to holders of preferred shares—a class of shares that sits between ordinary shares and debt. Unlike ordinary shareholders, preferred shareholders have priority when it comes to dividend payments and, often, during company liquidations. In exchange, they typically forgo voting rights and may see less capital appreciation than ordinary shares.
- Fixed or floating payments: Most preferred shares pay a fixed dividend, though some are linked to interest rate benchmarks.
- Seniority: Preferred shareholders are paid before ordinary shareholders but after debt holders if the company becomes insolvent.
- Franking credits: In Australia, many preferred dividends are franked, offering potential tax benefits to local investors.
The 2025 Landscape: Policy Shifts and Market Trends
Australia’s regulatory and market environment for preferred dividends has seen subtle but meaningful changes in 2025. Here’s what investors should know:
- APRA’s capital reforms: The Australian Prudential Regulation Authority (APRA) has clarified the treatment of hybrid securities (many of which pay preferred dividends) in bank capital calculations. This has prompted some banks to revise their hybrid offerings, potentially impacting dividend predictability and risk.
- Interest rate environment: After the RBA’s rate hikes in 2023–24, rates have plateaued, making the fixed-income features of preferred shares more attractive compared to government bonds, but with a higher risk/return trade-off.
- Corporate issuance trends: Major Australian banks and blue-chip companies continue to issue hybrid securities with preferred dividends, but 2025 has seen an uptick in callable structures—meaning companies can redeem shares early, affecting yield stability.
For example, in March 2025, NAB issued a new tranche of capital notes with a 5.7% fixed dividend, fully franked, and a call date in 2029—demonstrating how these instruments fit into both regulatory and investor demand frameworks.
Should You Consider Preferred Dividends?
Preferred shares with reliable dividends can be a smart addition to portfolios, especially for income-focused or risk-averse investors. However, it’s crucial to weigh the risks:
- Dividend deferral risk: Companies can often defer payments on preferred shares (unlike traditional debt), especially if profits fall or regulatory requirements tighten.
- Call and conversion risk: Callable preferreds can be redeemed early, potentially at unfavourable times for investors. Some hybrids may also convert to ordinary shares under stress scenarios.
- Liquidity: Some preferred shares are thinly traded on the ASX, making it harder to exit positions without affecting price.
For tax-conscious investors, the franking credits attached to many Australian preferred dividends can be a significant advantage—particularly in SMSFs or for retirees seeking tax-effective income.
Real-World Example: How Preferred Dividends Fit a Portfolio
Consider an investor approaching retirement in 2025. With the ASX 200 yielding about 4% and government bonds below 4%, hybrid securities offering preferred dividends at 5–6% (with franking) become attractive. A diversified allocation to major bank hybrids can provide reliable income, but should be balanced with other asset classes to manage risks like early redemption or dividend suspension.
Key Takeaways for 2025
- Preferred dividends offer attractive, franked income and seniority over ordinary shares.
- Regulatory updates and market trends in 2025 are shaping the structure and risk profile of preferred shares in Australia.
- Investors should assess credit risk, liquidity, call features, and tax implications before diving in.
