In Australia’s evolving investment landscape, preferred stock is gaining renewed attention. With interest rates shifting and dividend yields under scrutiny, this hybrid security offers a compelling middle ground between shares and bonds. But how does preferred stock actually work, and who should be looking at it in 2025?
What Is Preferred Stock? A Quick Refresher
Preferred stock (or preference shares, as often called in Australia) sits between ordinary shares and corporate bonds. It typically provides:
- Fixed or floating dividends—paid before ordinary shareholders receive any dividends.
- Priority in liquidation—if a company goes bust, preferred shareholders get paid out before ordinary shareholders.
- Limited or no voting rights—unlike ordinary shares, you usually won’t have a say in company decisions.
ASX-listed hybrids and bank-issued capital notes are common examples of preferred-like securities on the Australian market.
Preferred Stock in 2025: Policy Updates and Market Trends
Australia’s hybrid and preferred share market is responding to several 2025 trends:
- APRA’s revised capital requirements for banks are making hybrid issues (such as convertible preference shares) more attractive for major lenders, leading to a wave of new offerings in early 2025.
- Interest rate volatility has boosted demand for fixed-income alternatives, especially from retirees and SMSFs seeking reliable yield.
- Taxation changes—the ATO confirmed in late 2024 that franking credits on eligible preference shares will remain available, a major plus for Australian investors using dividend imputation to reduce tax bills.
Recent ASX launches, like NAB’s Capital Notes 8 and Westpac’s Perpetual Preference Shares, reflect both growing demand and the competitive jostling among Australia’s big banks to shore up their capital bases.
Benefits and Risks: Who Should Consider Preferred Stock?
Preferred stock is not a one-size-fits-all solution. Here’s what to weigh before investing:
- Stable Income: Fixed or floating dividends often exceed yields on term deposits or government bonds.
- Lower Volatility: Preference shares tend to fluctuate less than ordinary shares, especially in downturns.
- Liquidity and Complexity: Not all preferreds trade actively on the ASX; some hybrid issues have complex features, like conversion clauses or call dates.
- Interest Rate Sensitivity: Rising rates can pressure prices, just like with bonds—something to consider in 2025’s unpredictable rate environment.
- Credit Risk: If the issuer’s financial health declines, dividends may be suspended or capital lost, as seen in the GFC.
Who’s it for? Preferred stock suits income-focused investors, retirees, or SMSFs who want a step up from term deposits, but who can accept some risk. For younger or growth-oriented investors, ordinary shares may offer better long-term potential.
Real-World Example: How a Preferred Share Performs
Let’s say you invest $10,000 in an ASX-listed bank preference share offering a 5% fully franked dividend. You’d receive $500 in dividends annually, plus franking credits to offset your tax. If market rates rise, the share price may dip, but your income stream remains steady (unless the bank hits trouble).
In 2025, with the RBA holding rates steady and inflation moderating, several hybrid issues are yielding between 4.5% and 6%—making them attractive compared to term deposits or government bonds yielding less than 4%.
How to Access Preferred Stock in Australia
Investors can buy ASX-listed preference shares directly through a broker, or via hybrid-focused managed funds and ETFs. Always review the product disclosure statement (PDS) to understand the specific terms and risks.
Key tips for 2025:
- Diversify—don’t overload on a single issuer or sector.
- Check franking status and tax treatment, especially if investing via a super fund.
- Review call dates and conversion features—some hybrids can be repaid or converted into ordinary shares, impacting risk and return.
