Callable preferred stock
Also known as: redeemable preferred stock
Callable preferred stock is preferred stock the issuing company can buy back from investors at a preset call price after a specified date, typically when interest rates have fallen.
Callable preferred stock is preferred stock that gives the issuer the right to redeem (call) the shares at a stated price on or after a specified call date. The call price is usually par value or slightly above it, and calling the stock ends the investor's dividend stream in exchange for the redemption payment.
Issuers call preferred stock for the same reason homeowners refinance mortgages. If a company issued preferred paying a 6% dividend and market rates later drop to 4%, it can call the old shares and issue new preferred at the lower rate, cutting its financing cost. That means calls happen precisely when reinvesting is least attractive for the investor — the redeemed money can only buy new securities at the now-lower rates.
To compensate for this call risk, callable preferred generally pays a higher dividend rate than otherwise identical non-callable preferred, and the call price may include a premium over par. Many issues also carry call protection: a period after issuance during which the shares cannot be called. A practical side effect is price compression — once the stock becomes callable, its market price tends not to rise much above the call price, since buyers won't pay far more than they could be forced to accept in redemption.
Preferred stock features and suitability are tested on the SIE, Series 6, and Series 65 exams. Know who benefits from the call feature (the issuer), when calls occur (falling rates), and why callable issues must offer more yield than non-callable ones.
Key takeaways
- Callable preferred stock lets the issuer redeem shares at a preset call price after a specified date.
- Issuers call preferred when interest rates fall so they can refinance at a lower dividend rate.
- Investors face call risk and reinvestment at lower rates, so callable preferred pays a higher dividend than comparable non-callable preferred.
- Call protection periods and call premiums partially offset the disadvantage to investors.
- The call feature benefits the issuer, not the shareholder.