Preferred Stock

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General Concepts

Preferred Stock

As a component of your overall portfolio, preferred stock may be a nice component for stability and income. Generally, preferred stock available on the market is issued by larger blue chip companies. Here is a brief summary of preferred stock.

Higher Claim than Common Stock

Preferred stock is a separate class of stock from common stock. Preferred stock trades separately and has its own stock symbol.

Preferred stock has a claim upon the company's assets ahead of that of common stock shareholders. In the event of a liquidation or bankruptcy, the preferred stock holders receive assets or distributions before common stock holders. However, vendors and debt claims still precede preferred stock holders.

Income and Growth

When preferred stock is issued, it's issued with a set dividend payment (usually). The dividend is generally higher than that currently paid on the common stock and, unlike the common stock, is guaranteed. If the company fails to make a payment on the preferred stock, the dividend is usually accumulated and paid back at some future time.

Preferred stock represents a kind of blend between equity and debt. Like a bond, the dividend payment is known and obligatory. Unlike debt, the stock represents a claim on the company assets. As such, it will grow in value as the company grows. But because preferred stock does not fully participate in the company's profits growth in the value of the company's stock is generally less than that of the common stock.

Cumulative Preferred

Most preferred stock is cumulative preferred, which means that if any dividend is omitted for any reason, an obligation is created to pay the dividend eventually. The accumulated unpaid dividends generally accrue without interest, though such a provision would be specified when the preferred stock is first issued.

Convertible Preferred

Preferred stock frequently comes with a conversion feature that allows the preferred stock holder to convert shares at a predetermined rate into shares of common stock. The rate may or may not be a 1:1 ratio. The conversion may be invoked after a specific time period, or upon attainment of specific market values for the common stock, or other variables.

The convertible feature often gives preferred stock a direct linkage to the growth of the common stock. Investors looking for dividends and growth should look for convertible preferred.

Participating Preferred

Most preferred stock has a fixed dividend rate that does not change. Participating preferred provides for a feature that allows an additional dividend to be paid after the initial fixed dividend and after common shareholders have been paid a dividend. The amount of any additional participating dividend would be determined by the board of directors.

Appropriateness

Preferred stock represents an investment in equity with some characteristics of debt investments. Generally considered safer than equity investments they are often appropriate for income-oriented investors who wish to have some opportunity for capital appreciation.

Robert V. Green

MARKET PLACE