Definition
Preferred stock is a class of corporate equity that has priority over common stock for dividends and liquidation proceeds.
It typically pays a fixed or structured dividend and generally does not provide voting rights.
Key Features
- Priority dividend payments
- Fixed or formula-based dividend rate
- Liquidation preference
- Limited or no voting rights
Dividend Structure
Preferred shareholders must receive their dividend before common shareholders receive any distributions.
- Cumulative: Unpaid dividends accumulate.
- Non-Cumulative: Missed dividends are not owed later.
- Participating: May share in additional upside.
Position in the Capital Stack
Typical corporate hierarchy:
- Senior Debt
- Subordinated Debt
- Preferred Stock
- Common Stock
Preferred stock is junior to debt but senior to common equity.
Preferred Stock vs Preferred Equity
- Preferred Stock: Corporate share class.
- Preferred Equity: Broader term often used in LLC or real estate syndication structures.
Preferred Stock in Real Estate
Public REITs frequently issue preferred stock to raise capital. These securities often trade similarly to bonds due to their fixed-income characteristics.
Risk Profile
- Lower risk than common stock.
- Higher risk than debt.
- Limited upside compared to common equity.
- Sensitive to interest rate changes.
Common Pitfalls
- Assuming dividends are guaranteed.
- Ignoring call provisions.
- Overlooking interest rate sensitivity.
- Confusing liquidation preference with full capital protection.
Investor Checklist
- Review dividend terms (cumulative vs non-cumulative).
- Analyze issuer credit quality.
- Check call and redemption rights.
- Evaluate yield relative to risk.