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L9X:
Preferred stocks
maturity date like a bond, but it do es Possible pitfalls. So what is the
A special category have a par value, which is used to figure
out the payouts. (A good stock research
downsid e of owning a preferred stock?
Well, they do present potential and
website can help you find the par value actual disadvantages. When a market
of securities and preferred dividend rate of return.)
You determine the preferred dividend
sector heats up and common shares
take off, preferreds often lag behind.
by multiplying the preferred dividend Interest rate hikes can reduce th e value
worth exploring rate percentage by th e par value.
If you need to figure out the market
of preferred shares. Additionally, you
have no voting rights as a preferred'
value of a preferred stock, you can do shareholder.
tocks that tend to p'ay sizable divi·
S dends. Institutional and individual
investors buy preferred stocks
because they offer fixed

that simply. Divide the dividend amount

by the current yield.
Accumulating dividends. Sometimes
a corporation can't pay dividends to pre­
Ratings. There is no "official" rating
system for preferred stocks; however,
the big credit agencies that rate bonds
rate preferreds as well. Standard &
dividends - in fact, div·
ferred shareholders. If that's the case, Poor's and Moody's do, and when they
idend yields are typi·
the company will often let the preferred downgrade, it can hit a preferred stock
cally greater than
stock dividends accumulate until cash hard. Prefer red stocks rated beneath
those of common
flow improves. BiLB- at Standard & Poor's or beneath
shares.
The five kinds of preferreds. Most Baa3 bv Moody's are considered junk
Preferred stocks
preferred stocks are curriulative - that preferreds. If you have to go outside of
are occasionally
is, any missed dividend payments accu­ S&P or Moody's to find a preferred
called hybrid secu­
mulate for an eventual payout. Most stock's rating, that's a red flag - it
rities, because th ey
preferreds are also callable - that is, might mean that it couldn't get a decent
have characteris­ -";;=0;.;....""':"_-"-"",;;,;;",,,
the stock issuer has a chance to call rating from S&P or Moody's.
tics of debt instru­
GERRY MITCHElL
guest columnist (redeem) the shares at par value . A preferred stock investor would do
ments as well as
Yields on preferred shares sometimes well to research a company's financial
equities. Let's
include premiums in recognition of this ratios and cash flow, and its interest
review some of their features and pit­
risk. coverage ratio (higher is usually
falls.
Some preferred stocks are convert­ better).
Priority dividend payouts. As the ible, with embedded options allowing Consider th e variables. Preferred I
"preferred" adjective implies, thes e you the chance to exchange preferred stocks have looked attractive' to retirees I
shares are a step above common stock. shares for common ones. (Sometimes a and others seeking consistent divi­
If you own preferred stock in a com­ provision is allowed that gives the dends. Rather than explore them alone,
pany, you will get your divide nd first; all issuer the chance to call for the conver­ you should see a financial consultant
the common shareholders will get sion.) who can help you thoroughly unde r­
theirs second. You also have preference Some prefer reds are participating ­ stand your options ,in this area and com­
if a corporation declares bankruptcy or when a company does well, the divi­ pare them to other choices you may
. liquidates and sells assets. In that dends from these shares may be have.
instance, debt holders are paid first, greater than the published yield.
then the preferred shares, and finally Finally, when a corporation issues mul­
the common shares. tiple rounds of preferred stock, there Gerry Mitchell, CFP® is a
Dividend determination. Dividends
may be preference-preferred shares; if Representative with Community
paid out on prefer reds are akin to
you own shares from the first issuance, Investment Professionals and may be
coupon payments on a bond. A pre­
your prefe rreds take priority over pre­ reached at (601) 693-0200 or
ferred stock obviously doesn't have a
ferreds issued later. gerry. mitchell@invpro.com.