Why Preferred Stock Offers You Better Dividend Protection Than Common Shares

All investment can be risky, but the promise of a dividend when investing in company shares can be very attractive. If you invest in ordinary stock, companies are under no obligation to issue dividends at all, but if they do preferred stock than dividends must be paid first.

How it works

As always, the higher the dividend rate the higher the price, but preferred stock tends to go on the market for the same value and to pay higher dividends than common stock. Preferred stock also has a preferential claim to liquidation proceeds to that of common stock.

Downside

The downside is that there are no voting rights and the stock does not participate in the future earnings or dividend growth of the company, or the growth in price of the common stock. It also has less security protection than a bond.

Who issues it

Preferred stock is normally issued by companies to raise capital without ceding any control over the company. Common shareholders can elect the board for example, but preferred stockholders cannot. This type of stock is however becoming more and more rare and it tends to be only the major four banks who issue it.

Types

A company may issue several different types of preferred stock, some with greater rights, some convertible to common stock or some with monthly dividends, for example.

Who invests in them?

Most preferred stock holders are institutional as the investment carries less risk. The individual investor through, would probably only buy them once a decent-sized portfolio has already been established.