A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
Why are investors interested in preferred stock? It’s all about income. “Preferreds” (as they are generally referred to) usually pay higher dividends than common stock and have a higher yield than the same company’s bonds. If the company gets into financial trouble preferred dividends have to be paid before common dividends can be paid. If a company is liquidated, preferred stock holders are ahead of common stockholders if there are any assets left to be distributed.
What are the downsides of Preferreds? They do not have voting rights. They rank below bank loans, bond holders and most other obligations of corporations except for common stock. Most “retail class” preferred stocks are issued at $25 per share and usually have “call” provisions. That means that the issuer can redeem them for “par” ($25) after a number of years. This “call” is usually not exercise-able for 5 years, but can be exercised by the issuer any time after that. This means that the price of a preferred stock can drop if the company that issued it gets into financial trouble, but will not rise much above $25 during it’s lifetime.
Bottom line, common stock is purchased for growth, preferred stock is purchased for income. Choosing Preferreds requires a sophisticated knowledge of that particular market. If you are interested, be sure to work with an RIA who know this market.
Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.