Preferred Stock

Preferred stock is a class of ownership in a corporation that has a higher claim on assets and earnings than common stock. Preferred shareholders receive dividends before common shareholders and have priority in liquidation.

Key Characteristics:

Feature	Preferred Stock	Common Stock	Bonds
Dividends	Fixed, priority	Variable	Interest (fixed)
Voting Rights	Usually none	Yes	None
Price Volatility	Lower	Higher	Low
Growth Potential	Limited	Unlimited	None
Bankruptcy Priority	After bonds, before common	Last	First

Types of Preferred Stock:

Type	Description
Cumulative	Missed dividends must be paid before common dividends
Non-Cumulative	Missed dividends are lost forever
Convertible	Can convert to common shares at set ratio
Callable	Company can redeem at specified price
Participating	May receive extra dividends beyond fixed rate

Typical Preferred Stock Terms:

• Par value: Usually $25 or $100
• Dividend rate: 4-8% of par value
• Call date: Often 5 years from issue
• No maturity date (perpetual)

Example:

• $25 par value preferred with 6% dividend
• Annual dividend: $1.50 ($25 × 6%)
• Quarterly payment: $0.375

Advantages:

• Higher yields than bonds
• More stable than common stock
• Priority dividend payments
• Less volatile prices
• Predictable income stream

Risks:

• Interest rate sensitivity (like bonds)
• Limited capital appreciation
• Call risk (company may redeem when rates fall)
• No voting rights
• Lower priority than bonds in bankruptcy

Who Should Consider Preferred Stock:

• Income-focused investors
• Retirees seeking stable income
• Those wanting bond-like returns with slightly more risk
• Investors in tax-advantaged accounts (dividends taxed as ordinary income)

Where to Find Preferred Stocks:

• Banks and financial institutions (largest issuers)
• REITs
• Utilities
• ETFs: PFF (iShares), PGX (Invesco)