Is Preferred Stock Callable? Call Terms, Par Risk, and Taxes

Yes, preferred stock is callable in almost every case issued today. A call provision lets the company that sold you the shares buy them back at a fixed price, usually $25 per share, once a specified date has passed. That date is typically about five years after the original offering. After it arrives, the company decides — not you — whether your income stream continues.

What “Callable” Actually Means

A call provision is a clause in the preferred stock’s governing documents that gives the issuer the right to repurchase shares at a predetermined price. If you own callable preferred and the call protection period has expired, the company can force a buyback. You don’t get a vote.

The call protection period is the window after issuance during which the company cannot redeem the shares. For most exchange-traded preferred, that window runs about five years. Colony NorthStar’s Series I Preferred, for example, could not be redeemed until June 5, 2022, roughly five years after issuance, at which point the company gained the right to call the shares at $25 plus any accrued dividends.¹

Non-callable preferred stock, sometimes called “bullet” preferred, exists but is rare. When you find it, the yield is usually lower because the issuer has given up the flexibility to retire the shares.

Why Companies Call Preferred Stock

The most common trigger is a drop in interest rates since issuance. If a company is paying a 7% coupon on outstanding preferred and current market rates would let it issue new preferred at 5%, calling the old shares and refinancing saves real money. The math is the same as refinancing a mortgage.

Regulatory changes are the other big trigger, especially for banks. Bank-issued preferred must meet specific criteria to count as Tier 1 capital, and those instruments can generally only be redeemed with prior approval from the Federal Reserve Board.² When capital rules change, an old series may no longer qualify, giving the bank a strong reason to retire it. Many bank prospectuses include a special redemption clause that permits an early call, before the normal call date, if a regulatory or tax event makes the shares less useful.

Companies also call preferred to simplify their capital structure, prepare for a merger, or eliminate a series whose terms no longer fit. Whatever the reason, the decision belongs to the board.

How to Check the Call Terms on Your Shares

The definitive source is the prospectus filed with the SEC, typically a Form 424B document. It states the first call date, the call price, whether the company can redeem in whole or in part, and what happens to accrued dividends. The prospectus also cross-references the company’s charter documents (called a Certificate of Designation in some states, Articles Supplementary in others), which contain the legally binding terms.¹

You can pull these filings from the SEC’s EDGAR database by searching the company name and filtering for 424B filings. Most issuers also post them in the investor relations section of their website. Inside the prospectus, look for a section titled “Description of Preferred Stock” or “Optional Redemption.”

Two terms in those sections deserve close attention. “Optional redemption” means the company can choose whether to call. “Mandatory redemption” means the company is required to retire the shares on a specific date or after a specific triggering event. Optional is far more common. Mandatory shows up in some series and changes the risk profile entirely, so read carefully enough to know which one applies to your shares.

What Happens When a Call Is Announced

Once a company decides to call, it sends a formal Notice of Redemption to shareholders of record. The notice generally goes out at least 30 days and no more than 60 days before the redemption date.³ Some issuers set shorter windows. Citigroup’s Series V Preferred, for instance, requires only 5 to 30 days’ notice.⁴

The notice must state the redemption date, the number of shares being called, the call price per share, the CUSIP number, and the fact that dividends stop accruing after the redemption date.³ That last point matters. Once the redemption date arrives and the company has deposited the necessary funds, dividends stop accumulating on the called shares.⁵ Your holdings become a claim on a fixed cash amount rather than an income-producing security.

If you hold shares in a brokerage account, the mechanics are seamless. The shares disappear and cash appears at the call price plus any accrued dividends the terms require.

Do You Get Back Missed Dividends?

That depends on whether your shares are cumulative or non-cumulative, and it is one of the most consequential distinctions in any preferred stock prospectus.

Cumulative preferred requires the company to pay all accumulated unpaid dividends before it can redeem. If dividends were skipped for two years, those missed payments must be settled in full on the redemption date in addition to the call price.⁶ The governing documents typically bar redemption until arrears are cleared.

Non-cumulative preferred is different. At redemption, you receive the call price plus any dividends the board has formally declared but not yet paid. Dividends that accrued during the current period without being declared are forfeited, and undeclared dividends from prior periods are gone.⁷ Most bank-issued preferred is non-cumulative, which is worth knowing if bank preferreds make up a meaningful part of your portfolio.

The Danger of Buying Above Par

This is where callable preferred burns retail investors. If you buy shares at $27 on the secondary market and the company calls them at $25 par, you lose $2 per share on top of whatever dividends you collected. That capital loss can wipe out months of income, especially on a low-coupon issue. The risk is highest for shares trading well above par with a call date already in the past.

Current yield (the annual dividend divided by the price you paid) hides this danger completely. Yield to call does not. YTC calculates the annualized return you’d earn if the shares are called on the earliest possible date, accounting for the drop from your purchase price down to par. A preferred share advertising a 6% current yield can carry a yield to call of 2%, zero, or even a negative number if it is trading far above par with a call date in view. Check YTC before buying any callable preferred trading above par. It is the only honest way to price the security.

Reinvestment risk piles on. Companies call preferred stock precisely when rates have fallen, which is exactly when the cash you receive will earn less in any replacement investment. You lose a high-coupon income stream and rebuild at a lower rate.

Partial Redemptions and the DTC Lottery

Companies don’t always call an entire series at once. When only a portion is redeemed, the question is whose shares get called. The prospectus specifies either pro-rata treatment (a uniform percentage from every holder) or a lottery.

For shares held in “street name” through a brokerage, the Depository Trust Company runs the lottery. DTC uses a computerized selection based on each participant’s positions as of the close of business the day before the announcement. The lottery allocates the called shares across DTC’s member firms, and each brokerage then runs its own allocation to identify which client accounts are affected.⁸

You might own 500 shares and see 200 called, leaving a reduced position that generates less income. Someone else holding the same series might have none called. If a partial call would disrupt your income planning, check the prospectus for the partial redemption terms before you buy.

How the IRS Treats a Redemption

The IRS generally treats a preferred stock redemption as a sale, meaning capital gain or loss rules apply rather than dividend tax rates. You report the transaction on Schedule D using the Form 1099-B your brokerage sends.⁹

There is an exception. A redemption can be reclassified as a dividend if it is “essentially equivalent to a dividend,” which depends on how much stock you own and whether the redemption meaningfully reduces your proportional interest in the company. For a typical retail investor holding a small number of preferred shares, reclassification is unlikely. If you hold both common and preferred shares of the same issuer, or a large block, the analysis gets more nuanced.⁹

One less obvious wrinkle: if you received preferred stock at a price below its stated redemption value, the difference between your issue price and the redemption price may be treated as a taxable constructive distribution over the life of the security, not just at redemption.⁹ This mostly affects original purchasers of discounted preferred and is worth raising with a tax advisor if it fits your situation.