Why would someone buy preferred stock?
Preferred stock is attractive as it usually offers higher fixed-income payments than bonds with a lower investment per share. Preferred stockholders also have a priority claim over common stocks for dividend payments and liquidation proceeds. Its price is usually more stable than common stock.
Preferred stock often provides more stability and cashflow compared to common stock. Therefore, investors looking to hold equities but not overexpose their portfolio to risk often buy preferred stock.
Issuing preferred shares allows companies to diversify their capital structure, access additional funding sources and cater to investors with specific preferences for steady income and reduced risk. That tends to be a different group of investors than those who gravitate toward common shares.
The rights of preferred shareholders
Preferred shareholders do not have voting rights, but they have a priority claim on dividends and company assets vs. common shareholders. This makes preferred stock attractive to investors looking to manage volatility in their portfolio.
Convertible preferred shares give their holders the option of converting them into a set amount of common stock shares in the future. This gives the shareholder the potential benefit of capital appreciation in addition to the guaranteed benefit of a regular dividend.
Investors that are looking for income and are willing to take some risk for higher yields could consider preferreds, but investors with more-conservative to moderate risk tolerances might want to consider investment-grade corporate bonds instead.
Overall, preferred shares are an attractive option for investors seeking steadier income with a slightly higher risk profile than bonds but lower risk than common stock. They can be thought of as a hybrid security with characteristics of both debt and equity instruments.
The main disadvantage of owning preference shares is that the investors in these vehicles don't enjoy the same voting rights as common shareholders. 1 This means that the company is not beholden to preferred shareholders the way it is to traditional equity shareholders.
On the downside, there is a limit on how much the investment can appreciate because of its call feature. Issuers often call preferred bonds in low-interest rate environments so they can reissue a stock that pays a lower dividend. Unlike common stocks, preferred stocks do not have voting rights.
| Pros | Cons |
|---|---|
| Regular dividends | Few or no voting rights |
| Low capital loss risk | Low capital gain potential |
| Right to dividends before common stockholders | Right to dividends only if funds remain after interest paid to bondholders |
Does Apple have preferred stock?
APPLE INC.
The Company is authorized to issue Common Stock and Preferred Stock.
Investors are attracted to convertible preferred stocks because they receive dividends and can be converted to common stock at their discretion. Additionally, the dividends are not tax deductible.
Holders of preferred shares are also repaid first in the event that the company has to liquidate its assets, such as in a merger or acquisition or a “solvency event” like bankruptcy. However, unlike common stock, they don't usually come with voting rights.
Preferred stocks can make an attractive investment for those seeking steady income with a higher payout than they'd receive from common stock dividends or bonds. But they forgo the uncapped upside potential of common stocks and the safety of bonds.
Preferred stocks are more difficult to sell than common stocks. While common stocks can be sold in a matter of seconds, preferred stocks can take days or sometimes even weeks to find a buyer willing to take them off your hands . . . and that's when things are going well.
While preferred stock is senior to common equity on a bank's balance sheet, it falls below all other creditors, including subordinated or senior unsecured debt. The risk is that in a bank liquidation, preferred shareholders would get little to nothing in recovery. This is known as subordination risk.
Who Gets Which Kind of Stock. When early-stage startups issue equity, there are generally two classes of people receiving shares: employees or founders and investors. Employees and founders typically receive common stock. Investors, on the other hand, generally receive preferred stock.
Since preferred stock comes with a fixed dividend yield, they are highly sensitive to interest rates. If market-wide interest rates rise above the yield of a preferred stock, it will become harder to sell that stock on the market, and investors would have to accept a steep discount if they wish to sell.
Its value is affected primarily by changes in interest rates and the credit outlook of the company but without the upside appreciation potential of common stock. The income provided by preferred stocks can be attractive and is likely the biggest draw for investors.
In other words, they're really "preferred" by investors looking for a more secure dividend and lower risk of losses. The two main disadvantages with preferred stock are that they usually have no voting rights, and they have limited potential for capital gains.
Can you lose dividends with preferred stock?
service debt. A common equity dividend will typically be suspended first before a preferred share dividend is at risk although they may be suspended at the same time if the financial situation weakens materially such that the company is dangerously close to defaulting on its debt.
Preferred stocks often have no maturity date, but they can be redeemed or called by their issuer after a certain date. The call date will depend on the issuing company. There is no minimum or maximum call date, but most companies will set the date five years out from the date of issuance.
What does 7% preferred stock mean? A preferred stock's yield is based on the par value of its shares, not its current trading price. If a preferred stock has a par value of $25 per share (like most do), this would mean that shareholders would get $1.75 in dividend income per share each year.
CocaCola total common and preferred stock dividends paid for the twelve months ending December 31, 2023 were $-14.220B, a 17.53% decline year-over-year. CocaCola annual total common and preferred stock dividends paid for 2023 were $-7.952B, a 4.41% increase from 2022.
(AAPL), Exxon Mobil Corp. (XOM), Microsoft Corp. (MSFT), etc., offer preferred stock. Among the 30 largest corporations in America by market capitalization, the only ones that do offer preferred stocks are the Big Four banks – Wells Fargo & Co.
