Get Rich with Dividends: A Proven System for Earning Double-Digit Returns

Preferred Stocks

Preferred stocks are sort of a combination of a bond and a stock. They pay a higher dividend, sometimes can be converted into common stock, and are higher in the pecking order than common stock if the company is liquidated. However, they come after bonds in that situation.

If a company declares bankruptcy and its assets are sold off, bondholders will be paid first. Next come preferred shareholders, then shareholders of common stock.

Many preferred shares, known as cumulative preferred stock, will accumulate the dividend if it is not paid. When a dividend of a common stock is not paid or is cut, the shareholder is out of luck. If, sometime in the future, the company reestablishes a dividend, the shareholder starts from whatever dividend the company declared.

Cumulative preferred shareholders, however, see their dividends accumulate during the period that the company did not pay dividends. So if a company has an annual preferred dividend of $1 per share, stops paying a dividend for two years, and later introduces a $1 preferred dividend in year 3, the preferred shareholders will have to get paid out $3 per share ($1 plus the $2 missed) before any common shareholders can receive a dividend.

As a result of this greater stability, preferred shares are not as volatile as common stock. Preferred share investors typically will not see the swings in share price that investors will see with common shares—although during the financial crisis of 2008 and 2009, numerous preferred ...