What are Preferred Shares? Do You Invest in Preferred Shares?

I have dabbled in a lot of different types of investments, my most recent kick being my dividend investment portfolio, however, I have never really given thought to investing in preferred shares of stock.

What is a Preferred Share of Stock?

According to Investopedia a Preferred Stock is,

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation).

Some Common characters of preferred stocks include:

  • Preference in dividends – Preferred shares usually have a fixed dividend and if the dividend gets suspended preferred shareholders need to get their payments prior to a common shareholder
  • Preference in assets in the event of liquidation – in bankruptcy they receive liquidiated assets prior common shareholders
  • Convertible into common stock – Company can convert the shares into common stock usually at a set price
  • Callable at the option of the corporation – Corporation can pay off the preferred shares
  • Nonvoting

For most people I can’t imagine that getting preference in the event of a liquidation is of any consequence as most of their principal would be gone.  At least I know I’d still be pretty devastated if one of the companies I bought went under.

Additionally, I don’t think non-voting is exactly a detriment as most people rarely fill out those proxy votes, and even if they do most people don’t own enough shares to make a difference.  Not sure that is the best attitude about it, but sort of seems like the reality.

I couldn’t believe how difficult it was to find information about specific preferred share agreements.  The reason likely has to do with how there are no regulations in terms of how they are titled.  For example take a look at this excerpt from a 2010 USA Today piece on the subject,

Ford Motor Co. 7.5% Notes (F.PRA). This preferred security is often referred to as the class A Ford preferred. You can get up-to-date information about its price here.

This preferred was issued at $25 a share at a yield of 7.5%. It’s due in 2043. Currently, these shares are trading for $25.68 and as a result have a yield of 7.3%. You can read about the structure of this preferred security here. This is the Ford preferred security that’s best for most investors, as I’ll explain in a bit.

• Ford Motor Co. Capital Trust II (F.PRS). This preferred security is often referred to as the class S Ford preferred. You can get up-to-date information about its price here.

The Capital Trust II preferred was issued at $50 a share with a yield of 6.5%. It’s due in 2032. You can read about the structure of this preferred security here.

How is anyone supposed to look anything up? Notwithstanding the difficulties in finding each preferred share lets take a look at the one year chart comparing Ford and F.PRA:

You may have to click to enlarge the picture, but you can see that the preferred shares weren’t subject to the swings of the common shares and received a dividend of .48 cents each quarter.

Do you own any preferred shares? How did you find out about them? What are the terms?

5 Responses to What are Preferred Shares? Do You Invest in Preferred Shares?

  1. I don’t own any preferred shares but I would consider them for my portfolio. My only hesitation is that with preferred shares you don’t share in the upside that common shareholders have.

    • But you get all that income! Despite having a risk tolerance of an 82 year old woman…I think they are a little safe even for me at this point.

  2. i’ve always viewed them similar to an annuity where you are guaranteed a payment of X, you minimize your loss but you do not participate in the hay days – if and when they come by during your holding period

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