The Preferred Share Dividend Plan

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.

Callable Shares

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.

Have you considered preferred share dividend stocks as part of your dividend plan?

27 thoughts on “The Preferred Share Dividend Plan

  1. I never thought about looking for yield in preferred shares. Didn’t Warren Buffet buy preferred shares of Golsman Sachs? I guess it is something to consider, particularly if I have a spare $10 billion! :)

  2. Not until now… :) LaTisha, you are helping to push me to be more aggressive in investing in the stock market. It will still be a few months, but it will most likely be months instead of years thanks to your posts.

  3. Well written… simply enough for anyone to understand. I certainly will… but I don’t let any particular type of stock, sector, etc. control my investment decisions… I go to where I will get the most return. If investors are buying a particular bond or stock because they are afraid the company may liquidate, then I’d stay away from them altogether.

  4. I guess these are Preference Shares in the UK. I have never been successful on the stock market mainly because you have to watch things like a hawk and that is really boring! I suppose the answer is to have a program to do it for you. Maybe, in which case Preference Shares could be an interesting pasttime.

    However with all savings, we need to be very careful these days – a slightest cough on the other side of the world and your savings go down the tube!

    1. Who said making money is boring? lol
      There are programs that will trade/invest for you but you have to beware of potential scams. It also could be good for you to check out programs with a financial advisor where they would do all of the investing for you.

  5. As a young person, I prefer the net gains of common shares over the steadiness of preferred shares. I have no problem taking on the additional risk in my diversified portfolio. I like index investing anyway.

  6. I have a few stocks in my IRA however I don’t like the risks that come with owning individual stocks. Unless you have a large amount of cash to diversify among many stocks it can be risky for the average investor. I like mutual funds and ETFs. You get to invest in equities and can leverage sectors and the diversification shields your portfolio from poor performance on individual stocks. There really is no reason the average investor should be investing in preferred stocks.

    1. After the past few months I don’t know if I can stomach it either! I’ve been getting more into ETFs but I enjoy taking the time to really research a good company.

  7. I have not considered preferred stocks for some of the very reasons you listed in this article. My problem with preferred stocks are that they do not have the upside of a common stocks and they do not guarantee interest like a bond. They also often come with restrictions, qualifications and tax issues. It seems as if preferred shares are mainly beneficial to people with huge sums of of money like Buffet who can call the shots as far as restrictions go.

  8. Good post! Will tweet!

    Because I index invest with most of my portfolio, I see no reason why I should invest in preferreds.

    Also, I am not a fan of having more investment products that are sensitive to interest rate movements; I’ve already got plenty of bonds.

    Good of you to point out the pros and cons.

    1. Yes, preferred shares are sensitive to interest rate movements and with the way things have been going lately, any investing in fixed income type strategies requires some thorough due diligence.

  9. Any thoughts on preferred shares ETFs like XPF and CPO? I have been debating to include one of them in my taxable part of portfolio.

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  11. I think that the biggest drawback of Preferred Shares is that it is hard to buy any plain vanilla types. The various features of a Preferred Share can get very complex very quickly. If you want to know the features of a particular Preferred Share, the annual statements give a good run down of them. There are also web sites that can advise you on what exactly all the features mean.

    The other thing you should be aware of is what the callable and redeem prices are compared to the current price. This would be to ensure that you do not get a capital loss, unless, of course, you might want one.

  12. Great article. I would just like to add another possibility of getting exposure to preferred shares. You can buy an Exchange Traded Fund with portfolio of preferred shares. This way you get diversified, you don’t lose time searching, and you can buy it with very low expenses. There are a few ETFs in Preferred Stock/Convertible Bonds, but the biggest is iShares S&P US Preferred Stock Index Fund (PFF).

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