Common stock is the standard stock that most of you think of when you think of the stock market. Each share entitles you to a fractional ownership and vote in a company. It may come with a dividend payment. It allows you to enter the company’s annual meeting and submit shareholder resolutions. Preferred stock is very different.
Preferred stock is more like a perpetuity paid by a company than a standard share of stock. The key differences of preferred stock, in general, are that it does not give the owner a vote and it pays a fixed dividend.
For investors nearing retirement, preferred stock can be a very good income stream. If a company has to stop paying the dividend on common stock, the shareholders are out of luck. If a company suspends a dividend on preferred stock, it is generally required to make catch up payments at a later date.
There are risks to preferred stock. In many aspects, it is treated like a bond with no repayment date. Some preferred shares may be callable, meaning the company has the right to buy the stock back whether you like it or not. They may be convertible, meaning the company can turn the preferred shares into common shares if the board of directors votes to do so.
It is important to note where preferred shareholders are ranked on the ladder of importance to a company in the event of financial hardship. Debt holders (bond holders) are given priority in terms of interest payments and liquidation. Preferred shares come later. Common shareholders are last in line. Preferred stock is often rated by the major debt rating agencies, such as Moody’s and Standard and Poor’s. Those rating help you judge the viability of continued payments.
I do not own any preferred stock, but I am not opposed to doing so in the future. It is important to keep a diversified portfolio, and preferred shares are a great tool to stay diversified as you near retirement or hope to avoid market volatility. You can buy preferred stock through your stock broker similar to any other stock transaction.
