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Investing In Preferred Stock
Preferred shares are sold in par value amounts and pay a fixed dividend to all stock owners. Many preferred stocks are convertible into common stock, and are callable by the issuing company. People who begin buying or investing in preferred shares enjoy a regular dividend payment and the ability to switch to common shares in the company.
The preferred dividend rate is similar to a bond interest payment, although unlike debt payments - the dividend is not an obligation to the company.
Most of the corporations that issue this type of stock are income based companies. They have the income to make these dividend payments. Buying preferred stock in a company is an income strategy.
Most dividends are cumulative. This means that if a preferred share has a dividend rate of 6%, but the company only paid 4% one year, they will them owe you 8% going forward. The amount of the stock dividend that was missed, is made up. Although this is not an obligation. Buying preferred shares gives the person the chance to
get the benefit of fixed income investing, but at a higher rate than a bond.
If the company goes out of business, preferred stockholders are paid ahead of common shareholders. Common shares get paid dividends only after preferred investors are paid.
Buying this type of stock or investing offers a fixed rate of return, but stockholders are still at risk if the company does not earn any income going forward. Unlike bond creditors, preferred stock investors cannot make claims on lost money if the company fails.
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