What Are The Benefits of Invesing in Preferred Stocks
There are pros and cons of investing in preferred stocks. Investing in preferred stocks is one way to assuring a continuous stream of income in the shape of dividends. What this means is that you are assured of a dividend income that may not be available to a common stock holder. Now, as an investor you must be familiar that there are two types of stocks, common stocks and preferred stocks.
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In case of cumulative, if the company fails to pay the dividend in the stipulated period due to various reasons, this must be paid at a later date by the company. So in essence, the dividends accumulate with each period that might be quarterly, semi annually or even annually. When the dividends are not paid, dividends are said to have passed and accumulate as arears in case of the cumulative stocks. In case of non cumulative stocks, if the dividends get passed, you don’t get any arrears. You lose the dividends forever.
Now, there are a few cons of investing in these types of stocks. The most important is that you don’t get any voting right with these stocks. These type of stocks are sometimes issued by the companies to prevent hostile takeovers. So, as a common stock holders have the right to vote but as an investor in these type of stocks though you get preference in getting dividend payments but you don’t get the right to vote.
Another disadvantage of these type of stocks is that they can be called anytime by the company after a certain date. You can’ t do anything if the company decides to call back these stocks after that date.! Preferred stocks get thinly traded as compared to the common stocks.Whatever, there are always pros and cons of investing in any asset.
In case, you are looking for a fixed income stream like that you get for a bond then these type of shares should be included into you investment portfolio. Now payment of these dividends are however at the discretion of the company board of directors. If the company is facing cash problems, the board of directors may decide not to declare any dividends.! This is unlike that in the case of bonds where the payment of interest is guaranteed and the bonds are issued with the protection of an indenture. So even if the company is facing cash problems, the interest payment to the bond holders has to be made. But not in the case of these stocks. Another difference between preferred stocks and bonds is that interest payments are made through before tax profits whereas dividends are paid through the after tax profits.
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