Risk Considerations Risk Considerations   

About Preferred Securities

Preferred securities (preferreds) share characteristics of both equity and debt and are often referred to as hybrid securities.  Preferred security shares represent a class of ownership in a corporation that has a higher claim on the assets and earnings than common stock.  Preferred securities usually pay a fixed dividend that must be paid out before dividends are paid out to holders of common stock. Unlike common stock, preferred shares generally do not have voting rights.  Investors should remember that the payment of dividends is subject to the credit worthiness of the issuer and the issuer’s ability to make dividend payments.

Preferreds are issued with a fixed par value–commonly $25–and are usually perpetual, with no stated maturity date.  They may be callable, in which case the issuer has the right to redeem the shares prior to maturity at a predetermined price, which is commonly referred to as call risk. Dividend payments are either cumulative or non-cumulative.  Cumulative dividend rights entitle the holder to unpaid omitted dividends prior to common stock dividend payments and before the preferreds are redeemed.  The issuer does not have the obligation to pay omitted scheduled dividends in the future on shares carrying non-cumulative dividend rights.

Preferred shareholders typically do not have voting rights like common shareholders, yet as the name “preferred” implies, shareholders typically have a higher claim on assets in the event of bankruptcy than common shareholders.  Shares rank senior to common stock and junior to debt.  The issuer must pay preferred dividends or interest before common and if the company fails, obligations to preferred shareholders must be met before those to common and after bondholders.  The rating for preferreds is generally one or two levels below that of the same company's senior bonds because preferred income payments do not carry the same guarantees as interest payments from bonds and they are junior to all other creditors.

With par values typically less than that of bonds, preferreds are more accessible to a retail investor.  Preferreds can either be listed on an exchange or trade over-the-counter. 

As with other equity securities, an investor of preferred securities will generally recognize a gain or loss on the sale or other disposition of the securities.  Factors affecting the price include interest rates, credit quality and structure.

Please see TYPES OF PREFERRED SECURITIES for more information on different types of preferred securities.