Time for Another Look at Preferred Stocks

Like closed-end funds, preferred stocks are one of those relative backwaters of the investing world often overlooked by investors. This could be a good time to take a fresh look at preferred stocks.

First, it won’t hurt to give a fast explanation of this investment class, which combines elements of equity and fixed income instruments.

The ABCs of Preferred Stocks

In terms of a company’s capital structure and seniority of who gets paid if the company goes belly up, preferred shareholders stand behind bond owners (creditors get paid first), but ahead of common stock owners. Preferred stock owners also come before common owners if the company decides to pay dividends; they must be paid first.

Preferred shares also usually have a call provision, which means the issuer can repurchase the shares whenever it wishes, and they usually carry a fixed dividend, typically a percentage of the par value of the stock or a fixed amount. Sometimes the dividends float according to a benchmark rate.