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The Advantages of Participating in Preferred Stocks

Original post by Geri Terzo of Demand Media

There is not much volatility in a preferred stock's price.

Among the advantages for investing in preferred stocks is the rather reliable income that these securities typically provide. In addition, preferred shareholders receive some preference over other investors in the event that the issuing company files for bankruptcy. There are certain tax benefits reserved for corporate investors in preferred shares. Companies that invest in or issue preferred stock also are entitled to certain favorable tax treatment.

Dividends

An advantage of preferred-stock investing is the dividend, which is a recurring cash or stock distribution made by an issuing company to investors. Common stocks, the most pervasive type of equity securities, might also pay dividends. Preferred stock dividends are typically greater than those paid to common shareholders, however. And preferred stockholders are entitled to dividend payments over a specified time period. If an issuing company cancels a dividend, common shareholders cannot be paid any distributions until preferred shareholders are compensated first.

Bankruptcy

Many preferred shareholders enter these investments for the attractive dividend yields, which sometimes exceed that in the bond markets, as well as the consistent income. Even if an issuing company faces insolvency, preferred shareholders also have some advantages. If an issuing company files for bankruptcy, preferred shareholders have some seniority in the way that remaining funds or assets raised through liquidation are paid. Preferred stockholders are entitled to repayment ahead of common stock investors but only after senior lenders and bondholders have been paid.

Tax Advantage

There is a tax advantage for certain corporations that invest in preferred shares in the stock market. The tax favor is called a dividend received deduction, and it prevents the investing corporation from being overtaxed on an investment. In the U.S., corporations are entitled to a tax deduction of up to 70 percent of the revenue earned through a preferred stock dividend distribution, according to the Franklin Templeton website.

Issuing Company

An issuing company is the entity that is making preferred shares available to the market. Issuing preferred shares is a creative way for issuers to raise capital without diluting the stocks of common shareholders or piling debt onto a balance sheet, according to the Morningstar Advisor website. Issuers of trust preferred shares, which are the most common type of preferred shares, are eligible for tax deductions on the dividends paid to investors.

                   

References

About the Author

Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.

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