Preferred Stock Benefits
- Corporations can issue preferred stock with several features not available for common shares. Although it can be sold permanently like the common, preferred stock can also have a callable feature, making it redeemable by the issuing company at or even higher than the current market price. Convertible preferred stock is another option that enables investors to exchange their holdings into common stock, a popular choice for those with stakes in high-growth companies.
- Among the prime advantages of preferred stock is its lower risk, as holders are paid before common shares (but only after bondholders) if the company goes bankrupt or must otherwise liquidate. Investors looking for the comfort of higher yields also turn to preferred stock, together with the safety of knowing that their dividends must be paid before those allocated to common stock.
- Cumulative preferred stock provides recourse to holders if the issuing company does not pay its dividends on time. They continue to accrue and if not ultimately paid, the stock becomes votable. Those owning preferred shares can then push for new management or operational changes. Participatory preferred shares represent another sweetener to investors, as their dividends can increase if the company posts strong profits.
- In addition to the benefits enjoyed by investors, companies issuing preferred stock enjoy advantages as well. Doing so improves the balance sheet and does not weaken common stockholders' voting power. Issuers are not legally required to pay preferred dividends in case of financial difficulties, nor must they redeem the shares, both of which are generally required with bonds.
