As interest rates in the U.S. continue their downward march, approaching the negative interest rate environment in Europe, many investors are attracted to the relatively high yields offered by an instrument that offers the safety and security of a bond, while allowing for the potential to participate in the appreciation of the investment, much like the holders of an enterprises common stock.
Preferred stock can offer investors the best of both worlds: relative safety and high yields. These hybrid instruments typically offer more robust payouts than U.S. Treasury Securities and more safety than common stock, as preferred shareholders are priority creditors in the event of a liquidation.
The dual characteristics of preferred has made the $500 billion market a haven for those whose quest for better than paltry yields, as well as safety, has proven unattainable.
Companies usually issue preferred stock with a “par” or face value of $1,000 and a fixed dividend rate. The lower risk presented by preferred stock is that its dividends must be paid first, before a corporation’s common stock holders receive any distributions. The priority rights of preferred shareholders are spelled out in a covenant between them and the issuing corporation.
Indeed, the company is contractually obligated to give preferred shareholders priority in dividend distributions. For some preferred issues, the company must make up any fixed preferred dividends that are in arrears, in addition to the preferred shareholders fixed payout, before it can distribute any dividends to common holders. Some corporations issue convertible preferred stock that allows holders, under certain specified