Preferred Stock Definitions
By: Tim McPartland,
Callable – see redeemable below. Sometimes used to describe a ‘redeemable’ issue.
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.
Convertible Preferred Stock – Shares that can be converted into a fixed number of common shares of the issuer.
Coupon – the stated dividend payment rate when preferred stock is issued.
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.
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 (now required to be used by banks and insurance companies to count as Tier 1 capital).
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.
Qualified Dividends – Eligible for a lower tax rate (either 15 or 20%). Banking issues are typically qualified while preferred shares of REITs are NON qualified.
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.
Suspended Dividend – The issuer has stopped paying the dividend for whatever reason–typically financial stress. If dividends are cumulative they must be paid in aggregate in the future (unless bankrupt). If non cumulative is suspended they are gone forever (banks and insurance companies issue non cumulative preferreds)
Term Preferred Stock – Having a specific mandatory redemption date.
Yield To Call – the yield that you, the owner, will receive if you hold until the call date (and the shares are actually called). We show the yield to call on preferred shares on our main alphabetical page.
Yield to Worst – is the worst yield you will earn holding a particular preferred stock. Yield to worst will either be the yield to call or the current yield (on the day you bought).