Chapter 12. Preferred Stocks

In Chapter 6, we discussed why investors who need or want more income than can be earned through short-term fixed-income investments should consider stable-value funds. The relatively high yields of preferred stocks make them another candidate that investors in similar situations typically consider. However, while preferred stocks offer relatively high yields, in general, they possess enough negative attributes to make them inappropriate choices for individual investors.

Standing behind debt holders in the credit lineup, preferred stocks are technically equity investments. They provide a specific dividend that is paid before any dividends are paid to common stockholders. While preferred shareholders receive preference over common equity holders (hence the term preferred), in the case of a Chapter 11 bankruptcy, all debt holders would have to be paid off before any payment could be made to the preferred shareholders. If a company were to be liquidated, both preferred and common stockholders would generally receive nothing.

Unlike with shares of common stock, which may benefit from the potential growth in the value of a company, the investment return on preferred stocks is mainly a function of the fixed dividend yield (although there are some variable preferred stocks available). A difference between conventional bonds and preferred stocks is that conventional bonds have a fixed maturity date, while preferred stocks may not.

Long Maturities

Preferred stocks ...

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