Advantages and Disadvantages of Preferred Shares
There are advantages and disadvantages to investing in preferred stock. Investing in preferred stock is one way to ensure a sustainable dividend in the form of income streams. This means that you can ensure dividend income that ordinary shareholders may not be able to obtain. Now, as an investor, you must be familiar with two types of stocks, common stock and preferred stock.
Preferred stock is a mix of bonds and equity. You are entitled to receive dividend income and pay this dividend before paying any dividend to the common shareholders. These types of shares can be converted into common stock. The company determines the rate at which the conversion can be completed. For example, for one of these types of stocks, you can get two shares of common stock, or even more.
Another bonus to holding these types of shares is that in the case of liquidation, you, as a holder of these types of shares, will give priority to the assets in comparison with the ordinary shareholders. The preferred stock can now be of both cumulative and non-cumulative type
If accumulated, if the company fails to pay dividends for a specified period due to various reasons, it must pay later by the company date. So, in essence, dividends accumulate quarterly, semiannually or even yearly. When dividends are not paid, the dividends are said to have passed and accumulated as shares in the case of accumulated shares. In the case of non-cumulative stock, if the dividend passes, you will not get any arrears.
Whenever a company announces a dividend, the preferred stockholder is first granted the right to distribute dividends, after which the common stock shareholder receives a dividend. These dividends are paid as a percentage of the face value or as a fixed percentage
Investing in these types of stocks now has several shortcomings. Above all, these stocks do not have the right to vote. These types of shares are sometimes issued by companies to prevent hostile takeovers. Therefore, since the holders of common shares have the right to vote, but as investors in these types of stocks, although you like to get paid dividends, but you do not get the right to vote.
These types of stocks are that they can be called at any time by a company after a certain date. If the company decides to call back these stocks after that date, you can not do anything. Preferred shares are less traded than common stocks
In any case, there is always a pros and cons to invest in any asset. If you are looking for a fixed income stream, if you get a bond, then these types of stocks should be included in your portfolio. It is up to the board of directors of the company to pay these dividends. If the company faces cash problems, the board of directors may decide not to declare any dividends
This is different from the bond interest guarantee, bond issuance protection contract. Therefore, even if the company faces cash problems, it must also pay interest to the bondholders. But not in the case of these stocks. The other difference between preference shares and bonds is that interest payments are made through pre-tax profits and dividends are paid through after-tax profits.