Preferred stock combines bonds and common stocks. Commonly, preferred stocks will pay a guaranteed. Besides, it also prioritizes its shareholders in times that the company faces bankruptcy and liquidation. Thus, Investing in preferred stocks will give you security.
Yet, for the trade-off from that higher dividend yield, preferred stockholders do not get the chance to grow their investment. That remains true even when the company grows. Other than that, preferred stocks are highly sensitive to the changes in interest rates and the competing investment’s relative yield.
In other words, the preferred stockholder capital gains can only come from purchasing the stocks during the declining interest rates.
Cumulative or Non-Cumulative Preferred Stock
In cumulative issue preferred stock, the unpaid dividend will pile up in a single account. That unpaid dividend is called as “in arrears.” Before the company can pay the dividend, the total in arrears balance should be fully distributed to the preferred stockholders.
On the other hand, if it is in the non-cumulative preferred stock and the stockholders miss to pay the dividend, then, they will never receive. Even when the company makes a huge record-breaking profits in the near future.
What Affects the Preferred Stock Value?
Here are the things that may affect the value of the preferred stocks.
Adjustable-Rate
The stockholders of preferred stock receive a different amount of dividends. That amount varies based on the number of factors stipulated by the company during the issuer of its initial public offering.
These last decade, many new preferred stockholders like to have floating rate dividend in order to reduce the sensitivity of the interest rate.
Convertible
The preferred stockholders have the chance to convert their stocks into common stocks. That way the stockholder can still get the benefit from the dividend income as well as the potential profit from the common stock in case the company grows significantly. At the same time, they still can protection if the company get bankrupt.
Voting or Non-Voting
Preferred stockholders can or cannot have the voting right in the company Throughout history, there have been cases, where the preferred stockholders only get their voting rights when the company has not paid the dividend for a certain period of time.
During that time, the stockholders will get a significant voting power to enforce the payment for their claim.
