Asset Classes

Preferreds

Preferred stocks are a hybrid security that is partially like a bond and partially like a stock

More About Preferred Stock

  • Preferreds pay a fixed payout like a bond
    • Investors usually purchase for this payout/income (not capital appreciation like stocks)
  • Preferred payments are considered dividends like with a stock - they are not contractual interest payments
    • company's can reduce their preferred dividend payments without recourse (unlinke a bond)
  • Usually less risky that common stock - preferreds are higher up on the capital stack
    • Companies are usually required to make preferred dividend payments before paying common holders
    • Preferred holders come before common holder during a bankruptcy
  • can be considered an orphan asset class:
    • stock investors consider them to be bonds and ignore
    • bond investors consider them to be stocks and ignore
    • primarily are owned by individual investors (some institutions)
  • usually pay better yields than common stocks
  • Preferred stocks usually have a par value of $25 per share (but not always)