7 Things to Know About Preferred Stocks
Many investors are familiar with common stock, the more widely held type of stock, but may not know nearly as much about preferred stock. Although both types of stock represent partial ownership in a company, there are big differences between the two. Here are a few things to know.
- Preferred stocks generally pay a fixed dividend. A fixed dividend gives investors a good idea of how much income to expect each period.
- Although dividends are expected to be paid each period, they are not mandatory. If a company's board of directors decides to temporarily suspend dividend payments and your shares are 'cumulative', the unpaid dividends accrue and must be paid to you before any dividends can be paid to common stockholders. If your shares are 'non-cumulative', unpaid dividends will not be paid later on.
- Many preferred stocks are rated by credit rating agencies. The ratings are designed to help investors assess a company's ability to pay dividends on time.
- Some preferred stocks have a maturity date. On that date, which may be decades after the shares were issued, the company will generally redeem the shares at a predetermined price. In certain circumstances, the company may have the right to extend the maturity date.
- Some preferred stocks are callable, which means the company has the option to redeem the stock at a set price after the specified date. One reason why companies make their stock callable is so that if interest rates decline, they can redeem preferred shares early and issue new securities that pay a lower interest rate.
- Preferred stockholders generally cannot vote on corporate matters, such as the election of the company's board of directors or proposed mergers and acquisitions, but they may have limited voting rights in certain situations.
- Preferred stock is senior to common stock. This means that if a company runs into financial trouble and has to liquidate its assets, preferred stockholders must be paid before any common stockholders are paid. However, bonds are senior to both types of stocks so a company's bondholders must be paid before any stockholders are paid.
Note that all investing involves risk, including the possible loss of principal. Preferred securities are subject to interest rate risk. When interest rates rise, the price of preferred securities usually falls. The effect is usually more pronounced for longer-term securities. Preferred securities also carry inflation risk; credit and default risk for issuers and counter-parties; call, reinvestment, and income risk; liquidity risk; special redemption rights and regulatory risk.
Questions or concerns? Copper Leaf Financial is a fee-only, fiduciary firm and we can help you by providing advice on all financial matters. With offices in Williston and Rutland, Vermont, we develop a customized wealth management (financial) plan designed to integrate every aspect of your financial life. This is "true wealth management" - a holistic, all-encompassing approach that goes beyond just investment advice. Call us today at (802) 878-2731 to schedule a strategy session and begin building your road map to financial success.Article published in May 2018 edition of Eye on Money.