Preferred Stock Newsletter: A Guide to Investing

Preferred stock is a type of equity that offers a higher claim on assets and dividends than common stock, but typically doesn't come with voting rights.

Preferred stockholders are essentially creditors of the company, meaning they have a higher claim on assets and dividends than common stockholders. They are also entitled to a fixed dividend payment, typically paid quarterly or annually.

Preferred stock can be a good choice for investors who want to generate steady income without taking on too much risk. It's also a good option for those who want to diversify their portfolio with a lower-volatility investment.

Preferred stock can be issued with various features, such as callable, convertible, or non-cumulative, which can affect its value and investment potential.

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Companies issue preferred stock as a way to raise money, which is paid out in a specific order in case of bankruptcy. This order is senior secured debt, senior debt, subordinated debt, preferred stock, and common stock.

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Preferred stock is a hybrid investment that combines characteristics of common stocks and bonds. It pays a regular income, but not in the form of interest like bonds do.

The price of preferred shares fluctuates, but is typically less volatile than common stock. This means it's less likely to experience sudden price swings.

Preferred shares don't usually realize capital appreciation like common stocks do, instead providing a yield as the return. This is what investors are typically looking for when buying preferred stock.

Preferred stock often doesn't come with voting rights, so if you're used to voting your shares, you won't have that opportunity with preferred stock.

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Preferred stock can have a more familiar feel to investors due to its ability to be traded in a self-directed manner, similar to bonds.

Most corporate bonds are issued at a par value of $1,000, whereas preferred stock might be issued at $100 or even $25 per share, making it easier to get into.

Preferred shareholders have a senior claim on company assets and earnings, which means companies have a greater obligation to pay preferred dividends than dividends on common stock.

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Preferred stock has a more familiar feel to investors who are used to trading stocks, not bonds. This is because investors can enter a ticker symbol and trade preferred shares in a self-directed manner, similar to trading stocks.

One benefit of preferred stock is its lower buy-in, with some issues starting at just $25 per share. This is in contrast to corporate bonds, which are often issued at a par value of $1,000.

Preferred shareholders have some seniority over common shareholders, meaning companies have a greater obligation to pay preferred dividends.

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Owning shares can be a great investment strategy, but it's essential to be aware of the potential risks. Preferred shares can be sensitive to interest rates, with their prices declining when interest rates rise.

This sensitivity is particularly pronounced in fixed-rate perpetual preferred shares, which can see their price decline by as much as 16.7% if interest rates increase by just 1%.

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Preferred shares have no maturity date, so their prices don't move toward par value like bonds do as they approach maturity. This makes them more susceptible to changes in interest rates.

Rate-reset preferreds may be less sensitive to interest rates, but their prices can still fluctuate substantially, especially if long-term rates rise more than intermediate-term rates.

Preferred stock is a type of investment that combines elements of both bonds and common stocks. It pays regular interest or dividends, but also represents an equity interest in the company.

Preferred stocks usually offer higher yields than common dividend stocks or bonds from the same firm. This can be attractive to investors looking for a higher return on their investment.

If the company faces a cash crunch, common stock dividends get cut first, giving preferred stockholders priority in dividend payments.

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Stocks are a type of investment that can help you grow your wealth over time. Companies issue stocks to raise money, and most corporate capital structures include stocks as a key component.

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Preferred stock is a type of stock that behaves like a hybrid investment, combining characteristics of common stocks and bonds. It typically pays a regular income in the form of a dividend.

The price of preferred stock fluctuates, but it's often less volatile than common stock. This is because preferred stock is sensitive to interest rate changes, which can affect its price.

Buyers of preferred stock are typically looking for income, not capital appreciation. Unlike common stock, which can appreciate in value when a company reports strong earnings, preferred stock's yield is its primary return.

Preferred stock usually doesn't come with voting rights, so you won't have the opportunity to vote your shares. This is in contrast to common stock, which often comes with voting rights.

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Preferred shares are typically issued with a par value of $25 per share and rank between bonds and common stock of a company.

They don't have a maturity date like bonds do, and dividends can be deferred or cancelled without causing a default for the company.

One key difference with common shares is that preferred shares don't participate in the potential upside if a company's earnings grow.

Preferred shares are also typically callable at a specific price, which limits the potential for price appreciation.

In Canada, the most common type of preferred shares are called "rate-reset preferreds", which pay dividends based on a rate that is fixed for the first five years, then resets every five years based on an index rate plus an additional fixed rate.

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Preferred stocks are hybrid securities that combine bond- and equity-like aspects.

They represent an equity interest in a company, just like common stocks, but also pay regular interest or dividends based on the face value of the security.

Preferred stocks usually feature higher yields than common dividend stocks or bonds issued by the same firm.

Their dividend payments take priority over those attached to the company's common stock dividends.

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If the company faces a cash crunch, common stock dividends get cut first.

Missing a preferred dividend payment is not considered a default event, but it can have consequences.

If the preferred stock is a cumulative issue, unpaid dividends are considered to be in arrears and accumulate in an account.

Those dividends must be distributed to preferred shareholders before any dividends can be paid to common stockholders.

While preferred shareholders have seniority over common shareholders, their dividends are not necessarily guaranteed.

Preferred stock comes in various types, each with its own characteristics and benefits. One common type is the non-voting preferred stock, which gives shareholders a claim on assets and dividends but no voting rights.

For example, in the case of a company like Johnson & Johnson, non-voting preferred stock provides a stable source of income for investors. This can be especially appealing to those seeking predictable returns.

Convertible preferred stock, on the other hand, can be exchanged for common stock at a later date, potentially increasing its value. This type of stock is often used by companies to raise capital without giving up control.

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Preferred shares can be sensitive to interest rates, which can cause their prices to decline when interest rates rise. This is because their values are often compared to long-term bonds, which also decline in value when interest rates rise.

A 1% increase in interest rates can cause the price of a 20-year bond with a 5% coupon to decline by about 11.6%. This is a significant drop, but the price of a 5% fixed-rate perpetual preferred share can decline even more, approximately 16.7% according to Edward Jones calculations.

Preferred shares with fixed dividend rates are generally the most sensitive to interest rates, and they don't have a maturity date like bonds do. This means they don't have a specified time when their principal will be repaid, making them even more sensitive to changes in interest rates.

Rate-reset preferreds may be less sensitive to interest rates because their dividends increase if the index rate rises, partially offsetting higher interest rates. However, their market prices can still fluctuate substantially, especially if long-term rates rise more than intermediate-term rates.

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Callable shares are typically redeemable by the company after five years, at a specific price known as the call price.

This call price is usually at or slightly above the par value, effectively capping the value of the share near this price.

Companies often redeem preferred shares when interest rates decline, which can leave investors with reinvestment risk, having to reinvest at lower rates.

The call price is a key consideration for investors, as it limits the potential upside of the share.

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Preferred shares are deeply subordinated, meaning they rank lower than bonds and most other claims on a company.

In the event of bankruptcy, preferred-share holders could receive a very low recovery.

Preferred shares have a lower claim on assets than bonds, which means they are at the bottom of the priority list.

This is a key difference between preferred shares and bonds, which are typically considered safer investments.

Subordination refers to the order of priorities in claims on a company, and preferred shares have a low rank in this order.

Dividends on preferred shares of large Canadian corporations can be considered "eligible" for tax purposes, meaning holders may be able to receive federal and provincial dividend tax credits.

These tax credits can reduce the total tax owed, which can be a benefit over interest income on bonds, which are generally taxed at the investor's income tax rate.

Preferred dividends can be suspended or cancelled by the issuing company. This can happen only if common stock dividends are also suspended.

If the preferred dividend is cancelled, the preferred share could drop in value significantly since it would pay no income and have no maturity. The perceived risk that the dividend could be suspended, known as "credit risk", increases, and the additional yield to compensate for this risk, referred to as "credit spread", will typically also rise.

Preferreds tend to be more sensitive than bonds to an increase in a company's credit risk. This is because preferred dividends can be suspended or cancelled at management's discretion, while failure to pay interest and principal on bonds typically results in bankruptcy.

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Holding preferred shares of large Canadian corporations in taxable accounts can be beneficial because taxes on dividends may be lower.

Dividends on preferred shares are generally considered "eligible" for tax purposes.

This means holders may be able to receive federal and provincial dividend tax credits, which reduce the total tax owed.

In contrast, interest income on bonds is generally taxed at the investor's income tax rate.

This may make preferred shares a more attractive option for investors looking to minimize their tax liability.

Preferred shares have generally underperformed high-yield bonds over time.

Lower investment returns are a major drawback of preferred shares. They've delivered lower returns than high-yield bonds, making them a less attractive option for investors seeking higher income.

Volatility of preferred-share returns has been higher than that of high-yield bonds, indicating higher risk. This means investors may experience more fluctuations in their returns.

Preferred shares tend to move in the same direction as Canadian common stocks more than high-yield bonds do. This limited diversification is a concern for investors looking to minimize risk.

Investors who seek higher income and can tolerate higher risk may want to consider high-yield bond mutual funds or exchange-traded funds instead.

Preferred stock can have a more familiar feel to investors, as they can trade preferred shares in a self-directed manner with a ticker symbol.

Compared to traditional bonds, which often trade over the counter, preferred stock offers a more accessible investment option.

Most corporate bonds are issued at a par value of $1,000, which can be a barrier to entry for some investors.

In contrast, preferred stock might be issued at $100 or even $25 per share, making it more accessible to a wider range of investors.

Preferred shareholders have a senior claim on company assets and earnings, which means companies have a greater obligation to pay preferred dividends than dividends on common stock.

Preferred stock investment can be a solid choice for those seeking steady income with higher yields. Preferred stocks typically offer higher yields than common dividend stocks but lack the opportunity for price appreciation as the issuing company grows.

One of the main benefits of preferred stocks is their transparency and convenience. They trade on a stock exchange, providing price transparency and liquidity.

While preferred stocks can be a good addition to a portfolio, it's essential to understand their characteristics. Preferred stocks are usually less risky than common dividend stocks, but they also lack voting rights.

Here are some key points to consider when deciding whether to invest in preferred stocks:

Ultimately, the decision to invest in preferred stocks depends on your individual financial goals and risk tolerance. It's crucial to do your own careful due diligence before making a decision.