Are you a preferred share dividend investor? Some investors stick with common stocks and bonds but there is a class of investments that sits nicely between stocks and bonds and it could be beneficial if you are looking for a fixed payment instrument with a bit more upside than a bond. Remember that with more risk comes more reward and you should speak with a financial advisor about what is best for your risk tolerance and portfolio. If you are interested in learning more about preferred stock investing for possibly twice the earning power of regular dividends please read on.
What Are Preferred Shares?
A preferred share is sold directly to investors but can then trade on a secondary exchange afterwards. It is a mix between a stock and debt. It has some of the benefits of stocks and some of the benefits of bonds. If you are familiar with corporate bonds then you know that a corporate bond comes with a promise to pay. Usually it will come with a coupon payment and if the company were to liquidate, bondholders have a higher claim than that of common share holders.
Preferred shares do have some of the drawbacks of bonds and stocks. As a common shareholder, you are entitled to vote because you are a owner in the company. A preferred shareholder is typically not entitled to voting rights. And even though they have a higher claim than that of common stock holders their claim comes after creditors. One of the most beneficial aspects of a preferred share is the dividend that comes with it. The dividend is not guaranteed but before the company can pay a dividend on common stock it must pay the preferred share dividends.
Are Preferred Shares Better Than Common Shares?
There are differences between preferred shares and common shares that cause some to prefer one over the other. However, it really is just a matter of preference. Preferred shareholders do not see the same profit potential that common stock holders see because common stockholders are part owners with a higher claim to profits. However, in the event of liquidation, preferred stockholders will see a payout while common stockholders may see nothing at all.
Common shares give the owner the right to vote while preferred shares often do not. Sometimes preferred stock will give the option to convert into common stock, these are convertible shares. And as I mentioned before, the dividend rate is usually negotiated as a fixed percentage on the preferred stock and must be paid before paying any dividends on common stock.
How To Find High Yield Preferred Shares with Dividends
If you are interested in finding high yielding dividend paying preferred shares then you might want to start with the companies that you already invest with. Typically there will be an A share class or P share that is the preferred share designation. They often provide twice the yield of dividend paying common shares. However, there are a couple of important points to remember when looking for preferred shares.
Interest Rate Movements
Preferred shares are sensitive to interest rate movements. Because they are a hybrid security and have many of the features of a bond, the value will move as interest rates rise and fall.
Some preferred shares are issued with a call option which is a benefit for the issuer, not you the buyer. A call option allows the company to ‘call away’ the preferred shares at a set rate which is usually described when the shares are issued. This will affect the potential yield that you can earn on the shares.
Rated Like a Bond
Preferred stock is rated similar to a debt instrument and the ratings agencies will give the shares a rating based on several factors including the issuers ability to pay. So you will want to make sure that you pay attention to the ratings.