Preferred Stock - Stock or Bond?

Preferred stocks are securities with characteristics of both stocks and bonds. Like a bond, preferred stock has a fixed dividend that it will pay to owners each year. Also like a bond, preferred stock owners do not have the ability to vote on the management of a company. Lastly, because preferred stocks pay a fixed dividend, the value of a preferred share fluctuates more from changes in interest rates than from the actual performance of the company that issued the stock.

However, preferred stocks do not have a maturity date like bonds. Additionally, if a company fails to pay a dividend on its preferred stock, it does not mean the company is bankrupt like the failure to repay a bond would indicate. A company can chose to skip a dividend payment on its preferred shares, but all unpaid dividends on preferred stock must be paid prior to payment of common stock dividends. In this way, preferred stock owners always receive dividend payments before common stock shareholders.

Preferred stocks have a place in some financial planning efforts, but be sure your financial advisor adequately explains the functionality of the asset before investing.