One of the advantages of investing in preferred stocks is the availability of options to choose from. There are different classes or types of preferred stocks that meet the different financial goals and objectives of investors or help in creating and maintaining a diversified investment portfolio. This article outlines and discusses each.
The Different Types of Preferred Stock
1. Prior Preferred Stock
A preferred stock that has priority over other types of preferred stocks when it comes to paying dividends. Note that preferred stocks receive dividends before common stocks. Prior preferred stocks receive dividends before other preferred stocks. However, because these stocks have less credit risk, they have lower returns or lower yields than other preferred stocks.
2. Preference Preferred Stock
Some companies also issue so-called preference preferred stocks. These rank below prior preferred stocks but provide dividend priority over other preferred stocks. These stocks also have sub-categories ranked based on seniority. The most senior preference preferred stocks have preference over less senior preference preferred stocks.
3. Cumulative Preferred Stock
A notable advantage of preferred stocks over common stocks is that they provide almost guaranteed dividends. However, there can be instances when an issuing company is unable to pay its preferred stockholders. Cumulative preferred stocks are another option. The unpaid dividends of these stocks accumulate for future payments.
4. Non-Cumulative Preferred Stock
Running in complete opposite with cumulative preferred stock is non-cumulative preferred stock. Holders are not paid any unpaid or omitted dividends. These investors are fundamentally not entitled to missed dividends. It usually has a higher yield than cumulative preferred stock but can be unappealing to certain investors because of its higher risk.
5. Convertible Preferred Stock
These preferred stocks can be converted to or exchanged for a predetermined number of common stocks of an issuing company. The exchange can occur at any time an investor decides and irrespective of the market price of the common stock. These stocks can benefit investors who want to maximize the unique advantages of common stocks.
6. Exchangeable Preferred Stock
This another type of preferred stock is somewhat similar to a convertible preferred stock. However, it specifically has an embedded option to have it converted to another security such as bonds. Stockholders can have them converted at any given time but the issuing company provides options as to what type of securities it can be converted.
7. Participating Preferred Stock
Remember that preferred stocks receive priority as regards dividend payouts over common stocks. The dividend is fixed at the percentage of the number of shares an investor holds. A participating preferred stock provides investors with the opportunity to receive extra dividends if the issuing company achieves its financial targets.
8. Callable Preferred Stock
A callable preferred stock can be “called” or redeemed by an issuing company at its discretion and on a specific date in the future. The redemption price may be equal to its original issue price or higher in other cases. The advantage of holding one is that it provides a guaranteed dividend payout regardless of the financial performance of the issuing company.
9. Perpetual Preferred Stock
This type of preferred stock has two major features. First, it pays a fixed dividend to investors for as long as the issuing company remains in business. Second, it has no fixed date on which the invested capital will be returned to the stockholders. It is still important to note that the issuing company retains redemption privileges.
10. Monthly Income Preferred Stock
A monthly income preferred stock is a hybrid security that combines some of the features of preferred stock and subordinated debt or corporate bond. The entire setup is complicated. A parent company creates a special purpose entity that sells preferred stocks. This entity lends the proceeds from the issuance of preferred stocks to the parent company.