What Is Preferred Stock? - dummies

By Matt Krantz

Preferred stocks, commonly called preferreds, try to give investors the best of both worlds. Preferred stock is a special type of stock that’s sold by companies and acts more like a bond. Companies pay preferred stockholders a fixed dividend from earnings.

Unlike with bonds, though, the company isn’t obligated to pay the dividend if it doesn’t have adequate earnings. If a company hits a tough patch, it can delay paying the preferred dividend until it regains its footing, after which it must pay the dividends it missed.

Preferreds have some advantages over bonds, though. Many preferreds give investors the option to convert their preferred stock into common stock. You might have the right to own a part of the company and enjoy the upside, rather than just collect a fixed interest payment. You can also buy preferred stocks through most online brokers.

Keep in mind, though, that many preferred stocks are callable, meaning that a company can retire the shares by paying investors’ money back, at any time. If that happens, you’ll no longer receive the interest payments.

You can find out more about preferred stock at these websites:

  • Winans International: Winans International maintains an index that tracks the value of preferred stock, called the Winans International Preferred Stock Index, or WIPSI. Click the WIPSI tab and scroll down the page, and you can see a plot of the index at this website.

  • iShares: iShares offers an EFT that tracks preferred stock. iShares’ S&P U.S. Preferred Stock Index Fund (symbol PFF) lets you invest in a basket of preferred stocks.

  • QuantumOnline: This site lets you search for preferred stock that might suit your needs. Just choose the All Preferred Stocks option from the Income Tables menu at the top of the page, and you’ll call up a new page with a list of all preferred stocks, their trading symbols, and interest rates. If you find one you’re interested in, write down the trading symbol and buy it through your online broker. The site is free, but you must register to use it.

  • CD3: This site provides news and quotes on preferred stocks, but it’s not free. Subscriptions range from $25 for access to some features for a month to $225 a year.