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Preferred shares have a higher dividend yield than common stockholders or bondholders usually receive (very compelling with low interest rates). Preferred shares have a greater claim on being repaid than shares of common stock if a company goes bankrupt.
Preferred shareholders have priority over a company's income, meaning they are paid dividends before common shareholders. Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.
Some types of preferred stock have a fixed end date in which, much like a bond, the original capital contributed is returned to shareholders. In most cases, preferred stock is considered perpetual. This means that the initial capital invested will not be returned.
Sometimes instead of cash, retractable preferred shares can be exchanged for common shares of the issuer. This may be referred to as a ?soft? retraction, compared with a ?hard? retraction where cash is paid out to the shareholders.
On the pro side, some of the best reasons to consider preferred stock include: Consistent dividend income, with fixed payout amounts and payment dates. First priority to receive dividend payouts ahead of common stock shareholders or creditors. Potential for larger dividends, compared to common stock shares.
4. Rate-Reset Preferreds: A rate-reset preferred share offers a fixed dividend payment where the rate of that payment is reset upon a specific date, typically every five years. Generally, the rate will be a pre-determined spread above a government bond with a similar term.
In many ways, preferred stock is like a bond. For example, the major source of return on a preferred stock is usually its dividend. They are also more likely to pay out a higher yield than common shares.
Preferred stocks pay a fixed dividend to shareholders, are prioritized in the event of bankruptcy, and are less impacted by market fluctuations than common stock. Preferred stocks are typically purchased for their consistent dividend payments, which offer less financial risk to shareholders than common stock.