Preferred Stocks – Fixed to Floating or Floating Rate
By: Tim McPartland,
Preferred shares are shares issued by a corporation as part of its capital structure.
- Preferred stock have a ‘coupon rate’ — the interest rate you will be paid. This interest rate remains constant on most–but not all, preferred issues. A small number of issues have a rate that ‘floats’, based upon a baseline such as Libor.
- Dividends are either cumulative—Cumulative means that dividends continue to accrue if they have been suspended, but they are not paid until the company decides to pay them after suspension or non-cumulative. Non Cumulative means they do not continue to accrue (they are gone forever). In either case if the dividends are suspended the company is likely in deep financial trouble.
- Dividends are generally paid quarterly, although a few pay them monthly.
- Preferred shares normally carry no voting rights (unlike common shares).
- Preferred shares generally have NO maturity date (most are perpetual).
- Most Preferred Stocks have an optional redemption period in which the shares may be redeemed, at the issuers option, generally this is 5 years afer issue, but may be more or less.
How do You Buy Preferred Stocks?
You buy Preferreds just like you would any stock. Put in an order in your brokerage account and wait. The prime difference with preferred stocks is most trade very ‘thin’ (little volume) so you should always use ‘limit’ orders or you may pay way more than is necessary for your shares.
Fixed to Floating Rate Issues
Below are what we call ‘Fixed to Floating’ preferreds. They are issued with a fixed rate that typically lasts 5 years (a few 10 years) and then they go to floating rate. The rate then typically is 3 month libor (currently 2% as of 3/2018) plus a stated rate.
Floating Rate Preferred
These issues have floating rates from the day they are issued and always contain a floating rate formula with an overriding minimum coupon, usually 3-4.5%. Most of these issues use 3 month libor as part of the equation and add a fixed rate to 3 month libor. As of 2/2018 most of these issues may be “safe” issues, but the coupons are substandard.
As of 5/2017 most fixed to floating rate preferreds are trading higher after issuance. This is because we are now in a interest tightening phase and income investors are trying to assure their future income stream by capturing potential higher floating rate coupons in the future.