Preferred shares are a hybrid investment that blends features of stocks and bonds, offering fixed dividends and priority over common shareholders — here's how they work.
What are preferred shares
If you've been reading up on investing and stumbled across the term "preferred shares," you're not alone in wondering what makes them so... preferred. The name sounds like they're the VIP section of the stock market — and in some ways, they are.
A preferred shares definition that cuts to the chase: they're a type of equity that represents partial ownership in a company, but with fixed, predictable dividend payments similar to the coupon you'd receive from a bond. Unlike the common shares most people think of when they hear "stocks," preferred shares prioritize steady income over growth potential. You might hear them called preference shares, preferreds, or (in the U.S.) preferred stock — these terms all refer to the same thing. On a company's balance sheet, preferred shares are classified as preferred equity, sitting between debt (bonds) and common equity.
Here are the four core features that define preferred shares:
Partial ownership: you become a part-owner of the company (equity, not debt)
Fixed dividends: typically pay a set dividend rate, similar to a bond's coupon
Priority over common shares: preferred shareholders get paid before common shareholders
Limited voting rights: generally no say in corporate decisions
That trade-off — steady income in exchange for limited control — is what makes preferred shares attractive to certain investors, particularly those who care more about predictable cash flow than having a vote at the annual meeting.
How preferred shares work
Understanding the mechanics of preferred shares comes down to three things: how dividends are paid, what you give up in terms of voting power, and how redemption works.
Preferred dividends and payment priority
Preferred dividends are fixed payments made to preferred shareholders, typically expressed as a percentage of the share's par value or as a set dollar amount per share. If a company has both preferred and common shares outstanding, dividends on preferred shares must be paid first — before common shareholders see a cent.
There's an important distinction between cumulative and non-cumulative preferred shares. With cumulative preferreds, any missed dividend payments pile up and must be paid in full before common shareholders receive anything. Non-cumulative preferred shares don't carry that protection — if a dividend is missed, it's gone for good.
One thing to keep in mind: while preferred dividends get priority, they're not a legal obligation the way bond interest is. A company can suspend preferred dividends during financial difficulty without technically defaulting. That said, suspension is rare and usually signals serious trouble.
Limited or no voting rights
Preferred shareholders typically can't vote on corporate matters — no say in board elections, major acquisitions, or policy decisions. This is the core trade-off: you give up your voice in exchange for dividend priority and more predictable income.
In some limited circumstances — for instance, if a company suspends preferred dividends for an extended period — preferred shareholders may gain temporary voting rights. But for the most part, if you want influence over how a company is run, common shares are where that power sits.
Par value and redemption features
Most preferred shares in Canada are issued with a par value of $25. This is the face value assigned at issuance, and it's the price at which the company may redeem (buy back) the shares.
Many preferred shares are "callable," meaning the issuing company has the right to redeem them at par value after a specified date. When a company calls its preferred shares, it's buying them back — typically because interest rates have dropped and it can reissue new shares at a lower dividend rate.
Preferred shares vs. common shares
Both preferred and common shares represent ownership in a company, but they come with meaningfully different rights and risk profiles. Here's how they stack up:
Feature | Preferred shares | Common shares |
|---|---|---|
| Dividend payments | Fixed, paid first | Variable, paid after preferred |
| Voting rights | Typically none | Yes |
| Price volatility | Lower | Higher |
| Claim on assets in liquidation | Second (after bondholders) | Last |
| Growth potential | Limited | Higher |
Dividend payments
Preferred shares pay fixed dividends that must be distributed before any common share dividends go out. Common share dividends, on the other hand, are entirely at the discretion of the company's board — they can be reduced, increased, or eliminated altogether.
For income-focused investors, this predictability is a significant draw. You know what you're getting each quarter (assuming the company remains financially healthy).
Voting rights
Common shareholders typically receive one vote per share and can weigh in on board elections and major corporate decisions. Preferred shareholders generally have no voting rights — that's the fundamental trade-off for receiving dividend priority.
If having a say in how a company operates matters to you, this is a distinction worth noting.
Price volatility
Preferred share prices tend to experience smaller swings than common shares because their value is anchored to the fixed dividend and par value rather than to the company's growth prospects. Common shares are more volatile but offer greater upside tied to company performance.
Here's the caveat: preferred shares are sensitive to interest rate changes. When rates rise, the fixed dividend becomes less attractive relative to newly issued securities, and preferred share prices tend to fall. So "lower volatility" doesn't mean "no volatility."
Claim on assets in liquidation
If a company goes bankrupt or is liquidated, there's a strict payment hierarchy: bondholders (creditors) get paid first, preferred shareholders second, and common shareholders last. This gives preferred shareholders a meaningful layer of protection over common shareholders.
In practice, though, if a company is insolvent enough to be liquidated, preferred shareholders may still receive little or nothing after creditors have been paid.
Preferred shares vs. bonds
Preferred shares and bonds are often mentioned together because both offer fixed income — and the same type of investor tends to look at both. But despite their surface similarities, they're fundamentally different instruments.
Feature | Bonds | Preferred shares |
|---|---|---|
| Status | Debt (you are a lender) | Equity (you are a part-owner) |
| Payout type | Interest (legal obligation) | Dividends (discretionary) |
| Claim priority in bankruptcy | First (before preferred) | Second (after bondholders) |
| Voting rights | None | None |
| Tax treatment in Canada | Interest taxed as income | Eligible dividends may qualify for dividend tax credit |
Ownership vs. debt
When you buy a bond, you're lending money to a company — you're a creditor, not an owner. When you buy preferred shares, you're purchasing preferred equity — you become a part-owner, though your ownership rights are limited compared to common shareholders.
This distinction matters in two key ways: it affects how each instrument is treated in bankruptcy, and it affects how your income is taxed.
Income payments
Bond interest payments are a legal obligation. If a company fails to pay bond interest, it's in default — and that can trigger bankruptcy proceedings. Preferred dividends, by contrast, are discretionary. A company can suspend them during financial difficulty without triggering a default, though doing so sends a distressing signal to the market.
This makes bonds technically safer from an income-certainty perspective, though preferred shares often offer higher yields to compensate for the added risk.
Risk and return profile
Bonds sit at the lower end of the risk-return spectrum: lower yield, but the strongest legal claim on a company's assets and income. Common shares sit at the higher end: highest potential return, but last in line for everything. Preferred shares occupy the middle ground — higher yield than bonds (typically), lower volatility than common shares, but more risk than bonds and less upside than common shares.
This "middle ground" positioning is why preferred shares are often described as a hybrid investment.
Types of Canadian preferred shares
The Canadian preferred share market is distinct and well-developed, with several specific structures that investors should understand. Preferred shares in Canada trade on the Toronto Stock Exchange (TSX), with ticker symbols that typically include ".PR" followed by a letter (e.g., a company's first series might trade as XYZ.PR.A).
Here are the main types you'll encounter:
Rate-reset preferred shares
Rate-reset preferreds are the most common type in Canada. The dividend is set at a fixed rate for an initial period (typically 5 years), then resets based on the Government of Canada 5-year bond yield plus a predetermined spread.
At each reset date, the issuer may choose to call (redeem) the shares or extend them. Shareholders may have the option to convert to floating-rate preferred shares instead. Because the dividend adjusts at reset dates, rate-reset shares offer some protection against rising interest rates compared to perpetuals.
Perpetual preferred shares
Perpetual preferreds pay a fixed dividend indefinitely, with no maturity date. The company has no obligation to ever redeem them (though it may choose to call them).
Because the dividend never resets, perpetual preferred shares are the most sensitive to interest rate changes among the main types. When rates rise, their prices tend to fall more sharply than other preferred share categories. They may appeal to investors who prioritize income stability and are comfortable with interest rate risk.
Floating rate preferred shares
With floating rate preferreds, the dividend rate fluctuates alongside a benchmark interest rate — typically the Bank of Canada prime rate or the 3-month Government of Canada t-bill rate. This provides natural protection against rising interest rates: as rates increase, so does the dividend payment.
The trade-off is a generally lower initial yield compared to fixed-rate or rate-reset shares. But in a rising rate environment, floating rate preferreds tend to experience less price volatility.
Retractable preferred shares
Retractable preferreds give shareholders the right to "retract" (redeem) their shares at a set par value on a specific date or within a specified window. This feature provides a degree of certainty about your exit — you're not entirely dependent on the secondary market to sell.
Issuers may have the right to call the shares as well, so flexibility runs both ways.
Convertible preferred shares
Convertible preferreds can be converted into a predetermined number of common shares at the holder's option, under specified conditions. This gives you potential upside if the company's common stock price rises significantly — the conversion feature lets you participate in equity growth.
The trade-off: convertible preferred shares generally offer a lower dividend yield than non-convertible preferreds because of the embedded conversion option.
A note on participating preferred shares: some preferred shares carry participating dividend rights, meaning holders receive additional dividends beyond the fixed rate if the company's profits exceed a certain threshold. These are less common in Canada's public markets but worth knowing about.
Why invest in preferred shares
Preferred shares aren't for everyone — but they offer some characteristics that may appeal to certain investors. Here's what draws people to them.
Steady dividend income
Fixed dividends provide predictable, recurring cash flow. Unlike common share dividends, which can be cut or eliminated at the board's discretion, preferred dividends are set at a predetermined rate. This predictability makes them appealing to income-focused investors, particularly those in or approaching retirement who rely on investment income. Dividend payments are typically made quarterly.
Priority over common shareholders
If a company can afford to pay dividends to one class of shareholder, preferred shareholders get paid first. In liquidation, preferred shareholders have a claim on remaining assets before common shareholders (though after bondholders). This structural priority provides a layer of downside protection relative to common shares.
Lower volatility than common stock
Because preferred share prices are anchored to their fixed dividend and par value rather than company growth expectations, they tend to experience smaller price swings. This can make them a stabilising element in a diversified portfolio.
That said, preferred shares are still sensitive to interest rate movements — particularly perpetuals. Lower volatility doesn't mean low risk.
Tax-advantaged dividends in Canada
Dividends paid by Canadian corporations on preferred shares may be classified as "eligible dividends," which qualify for the federal dividend tax credit. In a non-registered account, eligible dividends are generally taxed at a lower effective rate than interest income from bonds. For investors in higher tax brackets, this can make preferred shares more tax-efficient than bonds for generating income.
Holding preferred shares inside a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) shelters dividends from tax entirely, which may be relevant depending on your situation.
Tax treatment depends on individual circumstances — consult a qualified tax professional for guidance specific to your situation.
Risks of preferred shares
Preferred shares come with real risks that deserve the same weight as the benefits. Here's what to watch for.
Interest rate sensitivity
Preferred share prices move inversely to interest rates. When rates rise, the fixed dividend becomes less attractive relative to newly issued securities, and prices fall.
Perpetual preferred shares are the most sensitive to rate changes. Rate-reset shares offer partial protection because their dividends adjust at each reset date.
Limited capital appreciation
Because preferred share dividends are fixed, preferred shareholders don't benefit from company growth the way common shareholders do. If a company's profits double, common shareholders may see their dividends increase and their share price climb. Preferred shareholders receive the same fixed dividend regardless.
If you're seeking capital growth, preferred shares are primarily an income instrument — not a growth instrument.
Dividend suspension risk
Unlike bond interest, preferred dividends are not a legal obligation. A company can suspend them during financial difficulty without triggering a default. While this is rare among large, established Canadian issuers — particularly banks and utilities, which dominate the Canadian preferred share market — it's a real risk for preferred shares issued by smaller or financially stressed companies.
Cumulative preferred shares provide some protection here: suspended dividends accumulate and must be paid in full before common shareholders receive anything. Non-cumulative preferreds don't offer this safety net.
Liquidity concerns
Some preferred shares, particularly those issued by smaller companies or older series, trade infrequently on the TSX. Low trading volume can make it difficult to buy or sell at a desired price — the bid-ask spread may be wide, and large orders can move the price.
Preferred share exchange-traded funds (ETFs) can mitigate this concern by providing exposure to a diversified basket of preferred shares with better overall liquidity.
How to buy preferred shares in Canada
If you've decided preferred shares belong in your portfolio, here's how to get started.
Individual preferred shares
Canadian preferred shares can be purchased through any brokerage account that provides access to the TSX. On the exchange, preferred shares are identified by ticker symbols that typically include ".PR" followed by a letter — so a company's first series of preferred shares might trade as XYZ.PR.A.
Before purchasing individual preferred shares, consider the type (rate-reset, perpetual, floating, retractable, or convertible), the issuer's credit quality, the current yield relative to alternatives, and the call date. You can find a list of preferred shares in Canada by searching TSX listings or using screening tools available through most brokerages.
Preferred shares can be held in registered accounts (TFSA, RRSP) or non-registered accounts.
Preferred share ETFs
For investors who prefer diversification without selecting individual preferred shares, exchange-traded funds (ETFs) that hold a basket of Canadian preferred shares are available on the TSX. A preferred share ETF provides exposure to many issuers and series in a single trade, reducing the concentration risk that comes with holding one or two individual preferred shares.
ETFs tend to have better liquidity than individual preferred share series, which can be an advantage if you want the flexibility to buy or sell without worrying about thin trading volumes.
Who should consider preferred shares
Preferred shares tend to suit a specific investor profile. They may be worth considering if you're:
Income-focused: you want predictable cash flow and are less concerned with capital growth
Seeking lower volatility: you want equity market exposure with smaller price swings than common stocks
Diversifying your portfolio: you're looking to add an asset class with different risk characteristics than bonds or common shares
Tax-conscious: you invest in a non-registered account and may benefit from the dividend tax credit relative to bond interest (though it’s important to note that you lose that benefit if your holdings are in a tax-advantaged account)
On the other hand, preferred shares may be less suitable if you're primarily seeking capital growth, have a short investment horizon, or are uncomfortable with interest rate risk.
Understanding where preferred shares fit — and where they don't — is the first step toward deciding whether they deserve a place in your portfolio.
