Information About High-Grade Preferred Stock

Preferred stock generally pays a higher dividend than common stock.

Preferred stock is a hybrid investment that shares characteristics with both bonds and stocks. High-grade preferred stock is issued by companies with strong financial performance.

Preferred Stock Structure

Preferred stock is equity, like common stock, but it ranks higher than common stock in the priority of payments. Preferred stock dividends are paid before common stock dividends, and in the event of liquidation, preferred stock receives any distributions first as well.

Preferred Characteristics

Preferred stock generally pays a higher dividend rate than common stock, but usually does not offer as much capital appreciation potential.

Preferred Stock Ratings

The credit ratings of preferred stocks are assigned by outside ratings agencies. Ratings range from "excellent" to "in default," with the top four grades designated "investment grade." Preferred stocks in the upper tier of the investment grade category are considered high-grade.

Interest Rates

Lower-rated preferred stocks must pay higher rates of interest to compensate investors for the increased risk. High-rated preferred stocks generally pay a lower rate of interest, as their payments are considered secure.

Taxation

Preferred stock dividends are taxable as ordinary income, although they may qualify for special tax treatment as "qualified dividends."

References

• FINRA.org: Stocks
• Investopedia.com: A Primer on Preferred Stocks
• IRS Tax Topic 404: Dividends