Risk Considerations Risk Considerations   

Preferred Security Features


Subject to the claims paying ability of the issuer, preferred stocks pay dividends with the exception of Trust Preferreds, which pay interest.  Preferred dividends may be fixed or floating and are most frequently paid quarterly.  They are either cumulative or non-cumulative and may be Qualified Dividend Income (QDI) and/or Dividend Received Deduction (DRD) eligible, depending on the structure and issuer.  Preferred securities are subject to the risk of loss and credit risk.  Investors should consult with a qualified tax and financial advisor before investing.

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.


If a preferred is callable, the issuer retains the right to retire or redeem the securities at a date or dates specified in the offering documents, termed the call dates. This is referred to as call risk.  Most Preferreds and Baby Bonds are issued as non-call five year securities.  That means that, depending upon the particular offering, the issuer cannot call the securities before the fifth year after the issue date.

Portfolio Risk Diversification

Possessing characteristics of both, preferreds are not necessarily highly correlated with either stocks or bonds, potentially adding to portfolio diversification, depending on an investor’s holdings.  However, diversification in itself does not ensure a profit or protect against a loss. Investments are subject to market risk, including possible loss of principal.


Many preferreds offer added yield compared to traditional bonds due to their long dated or perpetual nature, their subordinated position in the capital structure, and because they ordinarily pay quarterly versus semiannually coupon payments for bonds. Investors should remember that interest and dividend payments are subject to the claims paying ability of the issuer and investments are subject to the risk of loss.

Liquidation Preference

The priority of claims refers to the order in which investors receive their share of a firm’s net assets in the event of a liquidation. The diagram below illustrates the typical capital structure priority. A preferred’s place may vary depending on its specific characteristics outlined in the prospectus and prospectus supplement.

Priority of Claims

This Priority of Claims diagram is for illustrative purposes only.  Each security’s offering documents will govern the issue’s priority.

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