Preferred Stock

What preferred stockholders get

A typical preferred share has:

• Fixed dividend rate — predetermined dividend amount, paid before common stock dividends.
• Priority in liquidation — paid before common shareholders if company is liquidated.
• Limited or no voting rights — typically no role in corporate elections.
• Capped upside — fixed dividend doesn't grow with company performance.
• No expiration — perpetual unless callable.

The result: bond-like income with equity-like position in capital structure.

Preferred vs. common vs. bonds

Preferred sits between common stock and bonds:

• Bonds — most senior; fixed maturity; usually fixed payments.
• Preferred stock — senior to common; perpetual; fixed dividends.
• Common stock — most junior; perpetual; variable dividends; voting rights.

Different positions in the capital structure with different risk-reward profiles.

Major preferred stock types

A few variations:

• Cumulative preferred — missed dividends accumulate; must be paid before common dividends.
• Non-cumulative preferred — missed dividends are simply lost.
• Convertible preferred — convertible to common stock under specified terms.
• Participating preferred — receives extra dividends when common shareholders do well.
• Callable preferred — issuer can redeem at predetermined price.
• Adjustable-rate preferred — dividends adjust with reference rate.

Why companies issue preferred

Several reasons:

• Capital without diluting voting — preferred typically has no voting rights.
• Tax-disadvantaged for issuer vs. bond debt (interest on bonds is deductible).
• Counts as equity for some regulatory and rating purposes.
• Flexibility — perpetual structure with various features.

Preferred stock is most common in financial services and utilities.

Why investors buy preferred

Several appeals:

• Higher yield than common stock dividends typically.
• Priority over common in dividends and liquidation.
• Tax benefits in some structures (qualified dividend treatment).
• Fixed income with equity-like features.

For income-focused investors, preferred can fill a niche between bonds and dividend-paying common stocks.

Risks specific to preferred

A few:

• Interest rate sensitivity. Preferred prices fall when rates rise (like long bonds).
• Credit risk. If issuer struggles, preferred dividends may be suspended.
• Call risk. Issuers call when rates fall (refinancing); investors lose the high coupon.
• Equity-like correlation in stress periods.
• Limited liquidity for many issues.

How investors hold preferred

For most retail:

• Preferred ETFs — PFF (iShares Preferred), PGX (Invesco), others. Diversified portfolios.
• Direct ownership — for higher-net-worth investors with appropriate research.

Direct preferred ownership requires specific issue research; ETFs provide diversification.

Preferred in stress

A few notable cases:

• 2008 financial crisis — preferred shares of failing financial firms (AIG, Lehman) lost most or all value.
• Various utility and REIT preferreds generally weathered crises better.
• Call risk materialized when rates fell post-crisis — many preferreds called away from holders.

Preferred isn't a "safe" asset class; it has equity-like risks that show up in stress.

What individuals should know

For income-focused investors:

• Preferred fills a niche between bonds and dividend stocks.
• Higher yield comes with equity-like risk.
• ETF exposure is usually preferable to direct picking for retail.
• Call risk affects realized returns when rates fall.

For most investors, broad diversified bond and equity exposure captures preferred-like risk-return without specifically targeting preferreds. Specialized preferred allocation makes most sense for income-focused, higher-tax-bracket investors who want bond-like income with some tax benefits.