What is Adjustable Rate Preferred Stock?

Adjustable rate preferred stock is a type of preferred stock that pays out a dividend that is modified by changes in a benchmark rate. Modifications to the dividend typically occur on a quarterly basis. A common benchmark is the rate associated with Treasury bills. The calculation of the dividend and the linked benchmark rate is set when the shares are issued. The allowable dividend typically has a rate cap, to prevent the issuer from having to pay inordinately large dividends.

The market value of adjustable rate preferred stock tends to be quite stable, since the built-in rate adjustments insulate the stock value from changes in interest rates. This pricing stability differs from the market value of preferred stock that pays a fixed rate, since the fixed rate payouts vary in value over time, depending on changes in the market interest rate.