My Dividend Hunter subscribers are asking me about preferred stocks that will soon go from a fixed dividend rate to a floating rate. With short-term rates up significantly over the last two years, the small group of preferreds with fixed-to-floating interest rate clauses could make investors a lot of money.

Here’s how.

Fixed-to-floating rate preferred stocks are primarily issued by financial companies such as banks and finance REITs. Preferred shares usually pay a fixed dividend rate, with the dividend amount based on a set percentage and the preferred share’s par value.

For example, a preferred with a $25.00 par value and a 6% coupon rate will pay $1.50 per year in dividends, or $0.375 per share per quarter.

Most (almost all) preferred share issues become callable at a specified date. The issuer decides whether or not to call in shares. If shares do get called, investors receive the par value in cash. But a preferred may not get called in.

A fixed-to-floating rate preferred stock adds an additional twist. When a fixed-to-floating preferred stock reaches its call date, the issuing company can either call in the shares for the par value or start paying a calculated variable rate—the interest rate goes from the fixed annual dividend to a variable rate based on current interest rates.

For example, the Annaly Capital Management 6.50% Preferred G (NLY.PrG) shares became callable on March 31, 2023. Before the call date, the 6.5% coupon rate resulted in quarterly dividends of $0.4063. The floating rate after the call date is SOFR (Secured Overnight Financing Rate) plus 4.172%. The variable floating rate dividends have ranged from $0.59 to $0.62 per share for the last four quarters. NLY.PrG currently yields 9.9%.

Quite a few fixed-to-floating preferred stocks have call dates in the next several months. When these become callable, the issuer can either call in the shares at $25.00 or start paying the higher floating rate. Here are some preferred stocks to research:

MFA Financial, Inc. 6.50% Preferred C (MFA.PrC) becomes callable on March 21. The floating rate will be SOFR plus 5.395%.

Chimera Investment Corp 8.0% Preferred B (CIM.PrB) is callable starting on March 30. The floating rate is SOFR plus 5.791%.

PennyMac Mortgage Investment Trust 8.125% Preferred A (PMT.PrA) shares become callable on March 15. The floating rate will be SOFR plus 5.831%.

PennyMac Mortgage Investment Trust 8.0% Preferred B (PMT.PrB) Is callable on June 15. The floating rate for these preferred shares is SOFR plus 5.99%.

The next dividend for the listed preferred shares will be a few months after the call dates. You may not know what direction the issuer will take (call the shares or pay the variable rate) until a few months after the listed call date. If you can buy these shares at prices below par, the investments are a win-win, regardless of the issuer’s decision.