Is Preferred Stock more like Stocks or Bonds?

[Mark90]

My understanding of Preferred Stock is limited:

I think a preferred stock owner gets paid a dividend (which is paid out before common stock dividends) and that a preferred stock owner will be paid off before a common stockholder in the event of a bankruptcy. I also think preferred stock prices are less likely to go both up or down, which means there is risk that the principal decreases but also risk that the principal will not increase.

If anyone can offer more information as well as Pro's and Con's in dealing with Preferred Stocks, I would enjoy the education. thanx

[Mark90]

Did I post this question in the right place?

[Retired To Win]

My understanding of Preferred Stock is limited:

I think a preferred stock owner gets paid a dividend (which is paid out before common stock dividends) and that a preferred stock owner will be paid off before a common stockholder in the event of a bankruptcy. I also think preferred stock prices are less likely to go both up or down, which means there is risk that the principal decreases but also risk that the principal will not increase.

If anyone can offer more information as well as Pro's and Con's in dealing with Preferred Stocks, I would enjoy the education. thanx

You are correct. Just bear in mind that the price of the stock is not likely to go up very much (if at all), but can drop like a lead weight just as with common stock.

Two more facts about preferreds. They can be either cummulative (missed dividends get caught up) or not. And they can be convertible (the issuing company can convert the preferred stock to common at certain times and under certain circumstances) or not. I ALWAYS make sure any preferreds I buy are cummulative and are not convertible (because the company is never out to do you favors when they do a conversion).

Happy investing!

[Mark90]

You are correct. Just bear in mind that the price of the stock is not likely to go up very much (if at all), but can drop like a lead weight just as with common stock.

Two more facts about preferreds. They can be either cummulative (missed dividends get caught up) or not. And they can be convertible (the issuing company can convert the preferred stock to common at certain times and under certain circumstances) or not. I ALWAYS make sure any preferreds I buy are cummulative and are not convertible (because the company is never out to do you favors when they do a conversion).

Happy investing!

Thank you so much R.T.W. that was great information.

Would you mind me asking a deeper question? If there is a preferred stock to be found, which is both Cumulative and not convertible, is there way of knowing how much more risk this preferred stock has than one may find with a AA or AAA bond?!? It sounds like the original buy price of the stock will likely not move, which would be similar to a bond. Though if the original price of the stock were to drop, that could of course be a huge problem. Is it just a matter of "knowing" and "trusting" the company itself?

One other question; do the dividend prices change each quarter similar to common stock? Or is this more fixed as one could find in a bond?

[kv968]

Two more facts about preferreds. They can be either cummulative (missed dividends get caught up) or not. And they can be convertible (the issuing company can convert the preferred stock to common at certain times and under certain circumstances) or not. I ALWAYS make sure any preferreds I buy are cummulative and are not convertible (because the company is never out to do you favors when they do a conversion).

Happy investing!

Cumulative dividends are the way to go and most preferreds have that distinction but you want to make sure just in case.

Convertible preferreds would actually be a good thing because you decide if you want to convert them to stock or not, not the company but they're not the norm. What you're referencing is a callable preferred where the company can buy them back at a preset price and most of them are. Although with rates as low as they are I don't think many would be looking to do that.

[Mark90]

Cumulative dividends are the way to go and most preferreds have that distinction but you want to make sure just in case.

Convertible preferreds would actually be a good thing because you decide if you want to convert them to stock or not, not the company but they're not the norm. What you're referencing is a callable preferred where the company can buy them back at a preset price and most of them are. Although with rates as low as they are I don't think many would be looking to do that.

Thank you for the updated information.

Do the prices of preferred stock change similar to how a common stock price changes (many, many factors), or is it more closely related to interest rates as found with a bond?

[kv968]

Thank you for the updated information.

Do the prices of preferred stock change similar to how a common stock price changes (many, many factors), or is it more closely related to interest rates as found with a bond?

It could be either, especially if the company is going through a rough time, but for the most part they would correlate more with interest rates more than they would with the stock price.

Another thing with preferreds, just as with bonds, is that they often sell at a premium or discount on the secondary market. Most have call prices of $25 but the price you pay could be higher or lower depending on its quality and, more importantly, the interest rate environment as a whole.

[jIM_Ohio]

The dividend for preferred can also be higher than the common stock.

Some people like Warren Buffet have a way of negotiating transactions for preferred stock for reasons just like this. There are also mutual funds/ETFs which focus on these securities.

[Mark90]

The dividend for preferred can also be higher than the common stock.

Some people like Warren Buffet have a way of negotiating transactions for preferred stock for reasons just like this. There are also mutual funds/ETFs which focus on these securities.

Does this mean, if the All State Preferred Stock is offering the public a 6.75% coupon, that Buffett could talk them into giving his Preferred Stock 7% ?

are there any no load MF/ETFs that are only filled with Preferred Stock and that don't have much of any turnover and low fees overall?

[Mark90]

It could be either, especially if the company is going through a rough time, but for the most part they would correlate more with interest rates more than they would with the stock price.

Another thing with preferreds, just as with bonds, is that they often sell at a premium or discount on the secondary market. Most have call prices of $25 but the price you pay could be higher or lower depending on its quality and, more importantly, the interest rate environment as a whole.

So most of the time, when the interest rates rise, the prices of many preferred stocks will drop lower than they are now (or if they were still close to $25, they would drop under $25), is that pretty much accurate?

[jIM_Ohio]

Does this mean, if the All State Preferred Stock is offering the public a 6.75% coupon, that Buffett could talk them into giving his Preferred Stock 7% ?

are there any no load MF/ETFs that are only filled with Preferred Stock and that don't have much of any turnover and low fees overall?

During the economic bailout, I think Buffet convinced GE to sell him preferred stock at a discount, and that preferred stock had a much higher yield than the common. Check me on that, I think I have the company right- this was when banking crisis hit around 2008.

[kv968]

are there any no load MF/ETFs that are only filled with Preferred Stock and that don't have much of any turnover and low fees overall?

Some Preferred ETF's are PFF, PGX, PGF. These ETF's hold mostly, if not all, financial preferreds since that's the industry that creates the most of them.

There's also PFXF which is ex-financials (doesn't hold any financials). Its relatively new and doesn't have much assets under management but something to look at also.

There are also some mutual funds...Nuveen (NPSAX) and Cohen and Steers (CPXAX) which have actually done better than the ETF's, especially CPXAX. However they both charge load fees and have higher expenses. However if you could get one without a load I'd take a serious take a look since they can invest in some preferreds that the typical ETF can't.

[kv968]

During the economic bailout, I think Buffet convinced GE to sell him preferred stock at a discount, and that preferred stock had a much higher yield than the common. Check me on that, I think I have the company right- this was when banking crisis hit around 2008.

You're right Jim, old Warren took advantage of the situation and made himself a couple of bucks.

Not only did he buy preferreds of GE AND get warrants, he also did the same with Bank Of America and Goldman Sachs.

I guess being prudent with your money pays off in the end

[Mark90]

Some Preferred ETF's are PFF, PGX, PGF. These ETF's hold mostly, if not all, financial preferreds since that's the industry that creates the most of them.

There's also PFXF which is ex-financials (doesn't hold any financials). Its relatively new and doesn't have much assets under management but something to look at also.

There are also some mutual funds...Nuveen (NPSAX) and Cohen and Steers (CPXAX) which have actually done better than the ETF's, especially CPXAX. However they both charge load fees and have higher expenses. However if you could get one without a load I'd take a serious take a look since they can invest in some preferreds that the typical ETF can't.

do you invest in any of these, or would you? and if not, why not?

[budgetingtech]

Whether you are owning common stocks or preferred stocks(non-cumulative), you will be paid only if company will announce dividends. While in case of Bonds your return is confirmed.