Preferred Shares?

[TomK]

Anybody here have experience investing in preferred shares? I know little about them but have been doing a little bit of reading. Am I correct to understand that the dividends of preferred shares are generally fixed? That is, they are not raised annually like the dividends of the common shares we all know and love?

[hendi_alex]

Preferred shares represent company debt. The company borrows money form the investors and promises to pay usually a fixed rate over the life of the debt. Though most preferred shares have a minimum call date before which the company can not recall the shares, they do not usually have a maturity date. Therefore the company can let them go as long as such is advantageous to do so. Some preferred shares are cumulative, meaning that if the dividend is suspended for some reason, that dividend continues to accrue and must be paid later. As long as dividends are being paid on the common shares, the dividend can not be suspended on the preferred shares. Before dividends can be restarted on the common shares, accrual amounts on the preferred shares must be paid and regular payments resumed. Preferred stocks can sell at anywhere from discount to redemption to premium to redemption value, and that obviously affects the effective yield.

This info is in the context of my personal understanding, therefore could be subject to error.

[Dividend Watcher]

Alex is correct. Preferred is above a common share when it comes to liquidation but after secured debt instruments (bonds).

It makes then interest rate sensitive rather than company performance sensitive although there can be a slight margin due to company performance although I haven't been able to see it and identify it as such. Sometimes it's just a function of market inefficiency.

[hendi_alex]

Seeing how often bond holders end up being bag holders, that says something about how low the pecking order is for common share holders and preferred share holders. Best know that the company is top flight before investing in their preferred shares. I always look at the dividend on the common shares and view that somewhat as a margin of safety for the payments on the preferred shares.

[TomK]

So you buy them at the fluctuating market price, but the payout is fixed and will not increase year after year, like a bond? And the payout is in perpetuity, or only for a specified term?

[hendi_alex]

Quantum.com is a great location to get info on preferred stocks. The site requires registration, but is free. Preferred shares trade in a range around redemption value, usually $25 and at a specified yield (fixed quarterly payment). The extent to which you buy under redemption value increases the effective yield, and vice versa for paying a premium to redemption value. The shares usually carry a fixed period over which the company can not redeem the shares, but after that are subject to be called at any time. There is no maturity date for most preferred shares.

The following description of 0-F was copied from Quantum:
QUANTUMONLINE.COM SECURITY DESCRIPTION: Realty Income Corp., 6.625% Monthly Income Class F Cumulative Redeemable Preferred Stock, liquidation preference $25 per share, redeemable at the issuer's option on or after 2/15/2017 at $25 per share plus accrued and unpaid dividends, and with no stated maturity. Cumulative distributions of 6.625% ($1.65625) per annum are paid monthly on 15th day of each month to holders of record on the record date which will be the first day of the month in which the payment is due (NOTE: the ex-dividend date is at least 2 business days prior to the record date). Upon the occurrence of a change of control the company will have the option to redeem the preferred shares at $25 per share plus accrued and unpaid dividends. If the company has exercised their redemption right, the holders will not have the following conversion right. Upon the occurrence of a change of control, and the company has not provided notice that they intend to redeem the preferred shares, the holder will have the right to convert the preferred shares into common shares under certain circumstances (see the prospectus for details). Dividends paid by preferreds issued by REITs are NOT eligible for the 15% tax rate on dividends and are also NOT eligible for the dividend received deduction for corporate holders. In regard to the payment of dividends and upon liquidation, the preferred shares rank equally with other preferreds and senior to the common shares of the company. See the IPO prospectus for further information on the preferred stock by clicking on the ‘Link to IPO Prospectus’ provided below.

All of the above is fairly typical, though lots of preferred shares are not cumulative.

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Here is a link to the quantum site, but the link may not work without registering first.

http://quantumonline.com/search.cfm

[cannew]

Don't consider them Preferred, but like bonds. They do not increase the dividend so don't qualify as a DG choice.