Preferred Stock Dividends – A Flexible Stock Option

Preferred Stock Dividends – A Flexible Stock Option

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A preferred stock is way that company lends form people other than banks or lending institutions. In most cases, a company may defer or cut dividends as well as go into arrears without much of a penalty or risk to their credit rating. This is the reason why companies choose to borrow from people instead of institutions.

Preferred Stock Dividends

What are preferred stocks?

Preferred stock is considered a hybrid investment since it has both the qualities of a stock as well as a bond. It is considered higher to common stock, but is lower in ranking as compared to corporate bonds. If the company winds up then preferred stockholders are the first ones to get paid off. People having preferred stock are kind of like in for win-win situation. There is no risk involved in buying preferred stock. The only problem is that due to low risk involved they do not pay as much as other types of investment. Preferred stock holders have no obligation towards company. They also don’t have rights to speak in company as being shareholders. They get paid if company makes profit. If not then they are paid next year cumulative.

When we talk about payment for preferred stock we should always know that there are two kinds of preferred stock:

– Cumulative: they are ones that have to be paid even if the company doesn’t make profit this year, they are obliged to pay the cumulative amount next year for dividends.

-Non-Cumulative: its shareholders are not that much privileged. If the company won’t able to pay dividends one year then it has no obligation to pay preferred stock dividends for the missing year in coming time.

Another thing you have to keep in mind before investing into preferred stock is that convertible, until stated otherwise by company. That means if you think that company’s common stock will give you more yield then preferred ones then you can convert your shares into common stock. Also preferred stock is at disposal of company. They can be callable at a higher price then you bought it on.

Almost all preferred shares dividend is a negotiable amount. The dividend is usually specified as a percentage of the par value or fixed amount. Sometimes dividends on preferred stock may be negotiated as floating and it may change according to a pre-determined base interest rate such as LIBOR.

Comparison with Common Stock

In comparison to preferred stock, common stock investment is a little risky where return is concerned. As a matter of fact common stockholders have more rights in company and also have voting rights on board. Common stock holders get dividends if company is making extra profit even after paying all its obligations and dividends. These stock holders though have to suffer when company gets liquidated. On other hand they are not at all convertible. Whosoever has common stock may buy and sell them but cannot convert it in any other form of securities. Return on common stock is relatively more than preferred ones.

So next time you decide to invest in any company’s stock, keep the above information in mind to make better decisions.

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