Investors seek the highest return possible on their investments and evaluate securities for income received and growth potential. Investors with the primary goal of income look for assets with the highest yield. Dividend-producing stocks and bonds are among the possibilities. A third possibility, a hybrid security with some of the characteristics of stocks and some of bonds, are preferred stocks.
The best preferred stocks are those of companies with a long track record of paying common stock dividends, preferred dividends, and interest on their outstanding bonds. Investors want to ensure that dividend payments will be made every quarter in a timely manner. Financial institutions are major issuers of preferred securities. REITs, real estate investment trusts, are also major issuers of preferred securities. Many of the financial firms went bankrupt and others were battered during the 2008 financial crisis. The preferred of companies that survived and thrived are good possibilities, including the preferred issues of Wells Fargo and Goldman Sachs.
Characteristics of Preferred Stock
Preferred securities offer a fixed return similar to a bond. They are initially offered at what is called par value, usually $25 or $50 a share. The dividend is expressed as a percentage of par. A preferred with a par value of $25 and a 6 percent rate would return $1.50 yearly. Most issues pay quarterly dividends. The share price of preferred stock is not fixed and varies in the secondary market, moving up and down with interest rates. When interest rates go up, the price of the security falls. When interest rates fall the price of the preferred climbs. Although preferred prices vary, the prices do not experience the volatility of stock prices that go through extreme price increases and decreases. Some preferred are callable. Preferred rarely have maturity dates. There is no guarantee an investor will receive his entire principal when selling. Most preferred securities qualify for the 15 percent tax rate on dividends. The income of some preferred is considered interest and taxed as ordinary income. Investors need to find out before purchasing the tax implications of a security if it is for a taxable account. Preferred shareholders receive their money before common stockholders should the company declare bankruptcy, but bondholders have preference over preferred shareholders.
Types of Preferred Stock
There are four types of preferred stock. Investors seeking yield should look for cumulative preferred. If a company temporarily suspends dividend payments investors of cumulative preferred receive all of the unpaid dividends plus interest when the company resumes payments. Noncumulative preferred shareholders would not receive suspended payments. Participating preferred shareholders may receive an additional dividend or bonus payout if the company has extra money in their coffers after paying out common stock and preferred dividends. Convertible preferred may be exchanged for common shares of stock.
Locating preferred stock symbols is a frustrating exercise. There is no common system for assigning symbols. Many financial websites list all of a company's classes of outstanding common stock and preferred stock. The name of a company can be keyed in the quote box and the various common and preferred issues of a company will appear. MSN Money provides a list of a company's preferred stocks. The Wall Street Journal publishes a comprehensive alphabetical list of preferred stocks with their symbol, closing price, yield, volume and additional information. High-yielding issues as of April 20, 2011 included those of Bank of America, Merrill Lynch (part of Bank of America), BB&T, ING, Prudential and Excel Energy. The New York Stock Exchange also has an alphabetical list of all of the preferred issues traded on the exchange. See Resources for links.
- Photo Credit Comstock/Comstock/Getty Images
- Microsoft Support: How to Find Symbols for Preferred in Microsoft Money and MSN Money
- New York Stock Exchange: Listings Directory: Preferred Stock
- Wall Street Journal: Preferred Stocks: Closing Table
- Motley Fool: Gentlemen Prefer Dividends; Rick Steier; February 8, 2010
- Accounting Coach: Preferred Stock
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