What are Adjustable-Rate Preferred Stocks?
Adjustable-rate preferred stocks are a type of preferred equity security that features a dividend rate which is periodically adjusted based on market interest rates or an underlying benchmark. These securities are designed to provide investors with a hedge against rising interest rates, making them an attractive option for dividend investors in a fluctuating economy.
The dividend payments of adjustable-rate preferred stocks are typically indexed to a specific short-term interest rate, such as LIBOR or the Treasury bond yield. When these benchmark rates increase, the dividends paid to investors also rise, enabling them to maintain purchasing power over time. Conversely, if the benchmark rates decline, the dividends may decrease as well.
One of the key advantages of adjustable-rate preferred stocks is their potential for higher returns compared to fixed-rate preferred stocks during periods of rising interest rates. However, they also come with certain risks, including potential dividend fluctuation and price volatility. Additionally, investors should consider the credit worthiness of the issuing company before investing.
Overall, adjustable-rate preferred stocks can be an appealing option for those looking for income through dividends while seeking some protection against inflation and interest rate fluctuations in the broader financial market.