Definition of Perpetual Preferred Stocks
Companies raise their equity capital by issuing either common stock or preferred stocks. Common stockholders are the main owners of the company. They have voting rights in the company and may get a large share of the profits if the company makes money. Preferred stockholders are paid a fixed-rate dividend. The rate is fixed at the time the shares were issued. Preferred stockholders do not have voting rights in the company. Perpetual preferred stock issued by a company has no expiration date.
Other People Are Reading
-
Continuous Existence
-
As the name suggests, perpetual preferred stocks are those that exists perpetually. All other types of preferred stocks come with a maturity date. On the date of maturity, preferred stockholders can either convert their stock to common stock or redeem it for cash.
Perpetual preferred stocks do not have that convenience. Once the company issues this stock, it is obligated to pay these stockholders dividends whenever the company declares dividends, as long as it continues with its operations.
Payment of Dividends
-
Risk-averse investors buy preferred stocks. Every quarter, the company first discharges its financial commitments towards its creditors and then decides whether or not to declare dividends. When dividends are declared, the company first pays the preferred stockholders and then the holders of common stock.
Very often, companies issues cumulative perpetual preferred stock. In this case, the dividends keep accruing on the investment. If the company did not pay dividends in the previous quarter, but does choose to pay them in the current quarter, it is required to pay the holders of cumulative perpetual preferred stocks dividends for both the current quarter as well as the previous quarter.
-
Rate of Dividend
-
Though perpetual preferred stock is considered to be a safe investment, there is one major drawback: the dividend rate does not appreciate. The stockholders are paid a constant and fixed sum of dividend. Even when the company makes huge profits, the perpetual preferred stockholders are paid only at the rate set at the time of issue. Perpetual preferred stock ceases to exist only if the company is eventually liquidated. Until that time, the company is legally required show this stock on its balance sheet.
No Voting Rights
-
Perpetual preferred stock does not entail any voting rights for investors who purchase it. No class of preferred stock has the right to vote for company matters and policies. Only common stockholders have this right. Also, the holders of perpetual preferred stock cannot sue the company for nonpayment under any condition. They cannot adopt legal recourse if they are not paid dividends or ultimate payments when the company is wound up.
-
