|When you ask the average investor about stocks, virtually all of them will tell you about common stock. These are stocks that everyone is familiar with. These are the stocks with the ticker symbols everyone sees quoted and scrolling on a ticker. Mention preferred stocks, though, and you will probably get a blank stare. Most investors, if they have heard of them, have no real idea what these stocks are or how they differ from common stocks, nor can they tell you where to find them. This article is all about preferred stocks, to clear up any and all misconceptions that surround them.
WHAT ARE PREFERRED STOCKS?
The best part? Like common stocks, preferreds receive a dividend payment. Usually, that dividend will be paid. A company can suspend payment of a dividend to common stock holders, but preferred stock holders will get paid. That is not to say that a company cannot suspend the dividend payment on a preferred stock; it's just not as easy. Some preferred stocks require that any unpaid dividends have to be paid to the preferred stock holders before the company can begin paying out to common stock holders. It is important to note that not all companies issue preferred shares. Preferred shares usually come about when a company has the cash flow to pay the dividends but does not want to issue bonds. Since preferred shares have no voting rights, a company can issue preferred stock without diluting the current voting rights. Like common stock holders, preferred stock holders own a piece of the company. Nor are all preferred stocks the same. There are different types of preferred stocks that a company can issue: Callable: This is preferred stock issued with the right for the company to call the preferred some time in the future. The call date is listed in the prospectus.
Cumulative: Most preferred stocks issued will be cumulative. This means that if a company stops paying dividends or holds back part of the dividend, then these dividends must be paid before any other dividends. Preferred stocks without this feature are referred to as noncumulative.
Convertible: The ability to convert the preferred stocks. The time and price at which these stocks are converted are listed in the prospectus.
Participating: The dividend rate can be more than the stated dividend. The formula is listed on the prospectus. It is important to note that most preferred stocks are nonparticipating.
Adjustable-rate preferred stock: These are newer types of preferreds, and the dividend payments are based upon a number of different factors stated beforehand in the prospectus. These preferred stocks attempt to shield the holder of the preferred stock from interest rate fluctuations.
| THE GOOD & THE BAD
Advantages of preferred stocks:
1 Preferred stocks have priority over common stocks for dividend payments as well as company liquidation.
2 Prices do not fluctuate as much as they would with common stocks.
3 They pay a steady and consistent dividend.
4 They are more liquid than the same corporate bonds.
Disadvantages of preferred stocks:
When it comes to investing in preferred stock, investors will need to dig deeper. Finding these preferred stocks is not as easy as you might think. The ticker symbols for preferred stocks differ slightly from those of common stock. Some sites will list the preferred shares with a dash.
JPMorgan Chase preferred is a perfect example. On Yahoo!, "JPM-PF" is what the symbol would look like; the "pf" is short for preferred and will follow the ticker symbol. Yahoo! will also have another letter following that tells you the series. CNBC, on the other hand, will list preferred stocks on its ticker with "PR" after the ticker symbol. When looking for preferred stocks, you will also come across what are known as "series," like "Series A or B." Companies can have different series of preferred stocks that pay different yields. Look for company SEC filings like 423B and the like.
The biggest purchaser of a company's preferred stock is usually another company. The dividends received by a company are not taxed the same way as an individual investor is taxed when he receives dividends. US corporations that pay corporate income taxes are allowed to exclude 70% to 80% of the dividend income they receive.
IT'S THE STEADY DIVIDENDS
A higher-than-average dividend yield is one of the biggest factors that grab the interest of investors. Investors looking for a steady dividend without the price fluctuations often will choose preferred stocks for their portfolio.