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Uncle Sam takes a bigger tax bite out of the more common trust preferreds, which are considered debt. The tax advantage of traditional preferreds is useful if you hold your investments in a taxable account. Otherwise, payments on trust preferreds are somewhat more secure -- as debt, they have a prior claim on a company's assets if the firm runs into trouble.
Are the Dividends Secure? To check out the tax treatment or credit rating on a preferred share issue, you can ask your broker or visit a free online site like QuantumOnline. Remember -- these credit ratings are helpful, but not foolproof.
Some preferred stock issues may be equally secure as others, but have no credit rating. Are the Dividends Cumulative? Preferred stock dividends also come as either "cumulative" or "non-cumulative. In contrast, cumulative shares mean that if the dividends aren't paid, they accumulate from year to year until payment. Say the company faces a cash crunch and has to suspend all of its dividends.
If they are cumulative, the firm can't pay dividends to the common shareholders until it has first paid all the dividends that it missed to preferred shareholders. When is it Called and Does it Mature?
Under exceptional circumstances the company's management can cut or wholly eliminate the dividend paid to shareholders. Corporations tend to take such a drastic step only in case of severe financial distress and with the approval of the board of directors.
The cost of investment capital that mortgage REITs are able to raise is determined by the prevailing interest rates at the time while the revenue coming from the mortgages, at least to some degree, remains fixed until the mortgages mature. Remember that interest rates and the market prices of income securities typically move in opposite directions — rates up, prices down. In the United States, the issuance of publicly listed preferred stock is generally limited to financial institutions, REITs and public utilities. Preferred shareholders have a claim to a company's assets ahead of common shareholders -- that's why they're called "preferred. Straight preferreds are issued in perpetuity although some are subject to call by the issuer, under certain conditions and pay a stipulated dividend rate to the holder.
Unlike a bank or bondholder, who can sue the corporation for unpaid balances, owners of preferred stock have no option but to wait for matters to improve and the board to approve preferred dividend payments. Owners of preferred shares usually receive a fixed dividend, but they can occasionally end up with a smaller dividend check. When a company cuts or suspends dividends to owners of preferred stock, it cannot legally pay any dividends whatsoever to owners of common stock.
This is why these shares are said to have preferred status. In case of bankruptcy, too, owners of preferred shares must receive the full face value of their stock before owners of common stock can get anything from the proceeds of asset sales.
If several years of preferred dividends have been missed and the preferred shares are cumulative, all past missed payments must be paid in full before owners of common stock can get paid. If the preferred stock is noncumulative, however, only the current year's preferred dividend payment must be honored before owners of common stock can receive a dividend too.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank.
Preferred stock can provide a stable source of income. Remember that the par value is what shareholders will receive in cash should the issuing company decide to redeem your shares so buying shares below par sets you up for a downstream capital gain on top of the regular dividend income provided by these securities.
Note that I am using IPO date here, rather than the date on which retail trading started. If you are looking for information on this security, be extra careful that you are using the current symbol.
A special note regarding preferred stock trading symbols: Annoyingly, unlike common stock trading symbols, the format used by exchanges, brokers and other online quoting services for preferred stock symbols is not standardized. By high quality I mean preferreds offering the characteristics that most risk-averse preferred stock investors favor such as investment grade ratings and cumulative dividends. There are now a total of of these securities trading on U. But there is no need to wait. Individual investors, armed with a web browser and an online trading account, can often purchase newly introduced preferred stock shares at wholesale prices just like the big guys see " Preferred Stock Buyers Change Tactics For Double-Digit Returns " for an explanation of how the OTC can be used to purchase shares for discounted prices.
Your broker will automatically update the trading symbols of any shares you purchase on the OTC. As debt, the obligation to pay the interest on these bonds is cumulative.
ETDS are very similar to preferred stocks and are often listed on brokerage statements as such. Gladstone is incorporated as a business development corporation, investing in small to middle-market companies.