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What are High Yield Preferred Stocks?

2016-12-02T10:39:24+00:00

The term 'High Yield Preferred Stocks' is included in the Corporate Finance edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Preferred stocks are a special type of stocks that many companies issue. These types of stocks provide investors with a different level of ownership in a given company. A preferred stock holder obtains a higher priority on the earnings and assets of a company than a common stock holder would enjoy. These preferred stocks also pay a higher dividend that has to be given out before any dividends can be paid to the common stock holders.

As such, they represent a hybrid type of security on the stock markets. They are like common stocks in that they are bought and sold as stocks and represent ownership in a company. These stocks can also trade up and down in price like a common stock. Unlike a common stock, they do not come with any rights to vote for a company board of directors or items on a company ballot at the annual meeting.

They are also like bonds in that they pay a higher dividend that must be paid out unless the company lacks the earnings to pay these holders. In this way preferred stocks have elements of bonds with their fixed rate of dividends. Every preferred stock comes with its own unique details that are set when the company issues the stock.

Preferred stocks are often higher yielding issues. They are most commonly issued by companies that are in industries such as financials, real estate investment trusts, utilities, industrials, and conglomerates. Despite this higher yield that makes them like bonds, they can be traded on the major stock exchanges. They are typically found on exchanges including the NASDAQ and the New York Stock Exchange.

As preferred stocks are a type of equity legally, they show up as equity on any company balance sheet. Both common and preferred stock holders are owners in the company. There are several advantages to preferred stocks that investors like about them.

In the past, individual retail investors were less aware of preferred stocks, but this is changing. Part of the reason they have gained in popularity surrounds market volatility. As common stocks have seen wild price swings in recent years, investors have been looking for more stable instruments in which they can invest.

Preferred stocks fit this need as they tend to be more stable in price than do common stocks. With more baby boomers looking for investments that provide higher yields, this has brought preferred stocks into the spotlight. The retirees gain the advantage of better yields and the opportunity for the price to increase in the issues as well.

Preferred stocks are not new. They have existed from the time when modern day investing began. Institutional investors have known about and invested in them for many decades. Many individual investors did not because they lacked the information they required to select and trade them.

In the past, individuals did not have any lists of preferred stocks from which to pick. The information available was difficult to come up with before the Internet made this kind of information much more readily available. Now there are tools smaller individual investors can find that provide calendar searches for ex-dividend dates.

There are also screening filters that allow individuals to narrow down their search for the best high yielding dividend preferred stocks. Preferred stocks represent another way to diversify an investor’s portfolio and earn higher yields on dividends at the same time.

The term 'High Yield Preferred Stocks' is included in the Corporate Finance edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.