This is a column from regular contributor Clark.
Part I of the preferred shares series dealt with differences between preferred and common stocks, while Part II discussed the distinctions between preferred shares and bonds. This column will look at the many types of preferred shares (PS).
1) Prior PS. Corporations are likely to have various classes of preferred stocks outstanding at one time (e.g. Class A, Class B, “C” Series, “D” Series, etc.). From this lot, the corporation may prioritize one stock. After prioritization, in case of insufficient funds to meet the dividend payments of all preferred classes, the company only pays dividends on the prior preferred class of shares. The upside to being a prior preferred stock is that the dividends are relatively more secure; on the flip side, they usually have a lower yield than the other classes because of the stability of payments.
2) Preference PS. This could probably be classified as a sub-type of the first than one of its own. Preference preferred stocks are next to prior preferred shares in the seniority line. Such shares have preference over all other classes of preferred stocks except the prior preferred shares.
3) Perpetual PS. These shares have no maturity date and dividends at set rates are meant to be paid forever, assuming the corporation remains in business.
4) Retractable or Term PS. Term preferred stocks are issued with a maturity date. E.g., for a 10-year term stock, the company would repay the par value/share after 10 years.
5) Soft-retractable PS. Sometimes, a company may reserve the right to repay the par value of (term) preferred shares as cash or an equivalent number of common shares. Issuing soft-retractable preferred shares gives them this option.
6) Callable PS. Most preferred shares can be redeemed, which gives the issuing corporation the right to call their shares at (or after) a prescribed date and price.
7) Putable PS. Holders of this type may, under specific conditions established by the company, be able to force the company to buy back their preferred shares.
8) Fixed rate PS. The dividend for this type is paid as a set dollar amount or as a percentage of par values of the share.
9) Adjustable or floating rate PS. For this type of stock, the dividend rate is linked to a reference factor as outlined in the company’s prospectus. The dividend payments could be based on government bond yields or prime rate and hence, the payouts are adjusted based on changes in market interest rates.
10) Cumulative PS. For a cumulative preferred stock, the dividends are treated as accumulating when a payment is not made. If a corporation does not pay at specified intervals for any reason, as valid as it may be, they will have to pay the accrued dividends to preferred stockholders the next time they have excess cash before paying common stock owners. E.g., if a corporation missed three quarterly preferred dividend payments, then the first payment of the year (if they decide to declare that year) would be a cumulative total of all four payments.
11) Non-cumulative PS. As would be obvious, these stocks do not accrue unpaid or suspended dividends. Nonetheless, they may have a stipulation that preferred dividends (not cumulative) will have to be paid before any common dividends are declared, thereby establishing their seniority.
12) Convertible PS. This type gives the preferred share owners the right to convert their holdings to the company’s common shares at a set conversion rate. It should be noted that this class is riskier, since its performance is linked to common share price movements – the typical greater risk (if common shares drop in value, then investors may not deem convertibles worthy of conversion) that comes with greater reward (ability to convert and partake in common share price appreciation).
13) Participating PS. While uncommon, these stocks give the owners the right to dividend raises. Generally, preferred dividends are distributed at set rates but these participating preferred shares have the potential to earn more when certain conditions, as described by the company, are met.
Do you own any one (or more) of these types of preferred stocks? Are you aware of other types?
About the Author: Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.