Definitions

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Callable – see redeemable below. Sometimes used to describe a ‘redeemable’ issue.

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Change of Control – If a company is bought or someone purchases a controlling interest many preferred stocks have provisions for holders to redeem their shares (circumstances vary).

Contingent Voting – In certain circumstances preferred shareholders receive a vote–typically after dividends have been suspended for some predetermined amount of time.

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Convertible Preferred Stock – Shares that can be converted into a fixed number of common shares of the issuer.

Credit Rating – see rating below.

Cumulative – If the issuer suspends payment of dividends they continue to ‘accumulate’ and must be paid prior to any distributions on the common shares.

Floating Rate – The interest rate paid on the issue ‘floats’, typically after a period of fixed rate payment.  Normally based upon 3 month Libor plus a fixed rate, reset quarterly.

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Mandatory Redemption -A few issues have mandatory redemption dates (essentially a maturity date).

Non Cumulative – If the issuer does not pay a dividend it is gone forever (typically used by banks and insurance companies).

Participating Preferred – Preferred shareholders receive a coupon rate, plus a ‘participation’ in profits.  These are rare.

Perpetual Stock – Shares have no maturity mandated.  Likely can be ‘redeemed’ by the issuers 5 years after issuance (at the issuers option).

Preferred Stock – Ownership in a corporation without voting rights.  Has characteristics of both bonds and stock.  Normally pays a fixed interest rate.  Ranks senior to common stock, but is junior to all debt in a liquidation situation.

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Qualified Dividends – Eligible for a lower tax rate (either 15 or 20%).

Rating (Credit Rating) – Like a bond many preferred issues are rated by S&P, Moodys and/or Fitch.  This is not always the case and most REIT preferreds are not rated.

Redeemable – Shares can typically be ‘redeemed’, at the issuers option, 5 years after issuance.  Some issues have ‘redemption’ periods as soon as 1 year after issue and some as long as 10 years after issue.

Registered Investment Company (RIC) – A RIC is a domestic corporation that groups funds from more than 100 investors for the purpose of investing.  The investment Act of 1940 created RIC’s as a way for small investors to gain professional management and more diversified investment possibilities.   A RIC is required to distribute 90% of their taxable ordinary income and short term realized capital gains

Term Preferred Stock – Having a specific mandatory redemption date.

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Tim McPartland

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Tim McPartland
Tim McPartland is a private investor with over 45 years of investing experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.
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