Preferred Shares as a Form of Income

One option for dividend investors is to purchase preferred shares of good quality organizations. The difference between preferred shares and regular shares is that preferred have some additional rights attached to it that an investor receives.

The following, according to Wikipedia, are the additional rights that a preferred share owner receives from the shares:

* The core right is that of preference in dividends. Before a dividend can be declared on the common shares, any dividend obligation to the preferred shares must be satisfied.
* The dividend rights are often cumulative, such that if the dividend is not paid it accumulates in arrears.
* Preferred stock has a par value or liquidation value associated with it. This represents the amount of capital that was contributed to the corporation when the shares were first issued.
* Preferred stock has a claim on liquidation proceeds of a stock corporation, equivalent to its par or liquidation value. This claim is senior to that of common stock, which has only a residual claim.
* Almost all preferred shares have a fixed dividend amount. The dividend is usually specified as a percentage of the par value or as a fixed amount. For example Pacific Gas & Electric 6% Series A preferred.
* Variable preferreds are rare exceptions: their changing dividends depend on prevailing interest rates, or varying as a percentage of net income.
* Some preferred shares have special voting rights to approve certain extraordinary events (such as the issuance of new shares or the approval of the acquisition of the company) or to elect directors, but most preferred shares provide no voting rights associated with them.
* Usually preferred shares contain protective provisions which prevent the issuance of new preferred shares with a senior claim. This results in corporations often having several series of preferred shares that have a subordinate relationship.

This list is not comprehensive, the key thing to note is that if something should happen to the company, the bond holders are paid out there money first, and then the preferred shareholders, and then the regular stock holders. This provides some protection and reduces the security risk associated with the investment.

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