Value Investing

Preferred Stocks Investing

Writing this blog about dividend growth investment strategy, I had to write about preferred stocks investing. One can say a preferred stock is a hybrid. It may be half a common stock and half a bond. Preferred stock are those stocks that give regular stable dividends. They provide top priority over all other stocks. Common stocks cannot be paid dividends, until the complete dividend payment of preferred stocks has been completed, and in the event of bankruptcy, the preferred stock gets aid out first. During bankruptcy, the only party whose importance supersedes that of preferred stockholders is that of bond holder. Their repayment comes at the highest priority.

Preferred Stocks Investing

Each company will have a unique way in which it will classify its preferred stocks. And the possibility of the terms of preferred stocks differing from one country to another is relatively high. What may be common though, is the distinction of whether the preferred stocks are cumulative or non-cumulative. In a cumulative preferred stock, the unpaid dividends add up, i.e. they accumulate. They become dividends in arrears and the stockholder is entitled to the entire payment at the next possible dividend disbursement. The non-cumulative preferred stocks however are the opposite. If a dividend payment is omitted, then there will be no accumulation of that amount on to the next dividend payment. They will have to forego that installment.

Preferred stock may or may not come with voting rights. In the most common of cases, it is the common stocks that bear voting rights. There are instances where companies decide to award voting rights to preferred stocks to replace dividend payments.

The most logical question then becomes; should one invest in preferred stock? In all honesty the potentials of preferred stock investment are different between individuals and corporate portfolios. It may be difficult for a single person to see the benefit of investing in these over common stocks. This is because the federal law taxes income tax on the entire dividend received. With companies, Federal tax laws require them to only pay income tax on 30% of their preferred dividends, leaving the remainder tax free.

From here now we can close with the other minor type of preferred stocks.

Adjustable rate preferred stock

These stockholders receive adjustable dividends. The amount of dividends paid depends on a various number of factors communicated by the company at the time of the initial offering.

Participating preferred stock

This type of preferred stock receives an extra dividend on top of the usual one based on a stipulated percentage of either net income or dividend paid to stock holders of common shares.

Convertible preferred stock

These type of preferred stocks are tradeable for shares of common stocks. A stock holder has the advantage of weighing the dividend income or common stock profit. His investment has protection from the fall of either one. All the conditions to which the stock can change from one form to another are already in place.