We’ve written a few times before about U.S. preferred stocks. These are different from the stocks that make up what we usually think of as the ‘stock market’. The stock market is made up of ‘common stocks’. Each of the two kinds of stocks has its place, and you might very well want to invest some money in both. With common stocks near all-time highs, it is important to consider investment alternatives, as you may not want to commit more money to the stock market at these nosebleed levels.
The ‘preferred’ in ‘preferred stock’ refers to the fact that preferred shareholders have certain rights to the company’s assets, and these obligations must be satisfied before the common shareholders can receive any money.
Preferred shares (or ‘preferreds’) are a sort of hybrid between common stocks and bonds. Like common stocks, they are an equity stake in the company. Preferred shareholders are part owners of the company – they are not creditors, as bondholders are. But preferreds are like bonds in other ways. They do have a set face amount, which is called the issue price, call price or liquidation preference. They also have a fixed payment rate, like a bond’s interest rate. In the case of preferreds, this fixed payment is not called interest, it is called a dividend. The rate that a preferred stock pays in dividends is usually part of the name of the preferred stock. For example: DDR Corp 6.375% Class A.
This is a preferred stock issued by DDR Corp. The company pays dividends on this stock at the rate of 6.375% of the face value per year. ‘Class A’ refers to the fact that a company may have issued several different series of preferred stocks over the years, with different dividend rates. There might be a Class B, Class C, etc. This is not a recommendation, just an example.
There are a few things about preferred stocks that might make them attractive to you: