When designing an investment portfolio, preferred shares are classified as Fixed Income investments and they entitle the owner to a fixed, regular dividend payment. This is unlike common shares where the dividend payments are tied to the issuer’s earnings and board of director approval.
Preferred share dividends, just like common share dividends, are not a legal obligation of the issuing corporation and can therefore be omitted. (In other words, if the company's Board of Directors decides not to pay dividends on common or preferred shares, you cannot legally force them to pay!) However, the majority of issued preferred shares have a basic requirement that any unpaid dividends accumulate and the company is prohibited from paying dividends on its common shares until all of the accumulated preferred dividends have been paid in full. Preferred shares with such a feature are known as a cumulative preferred.
In the event that an issuing company runs into financial difficulty and the company is liquidated, dissolved or wound-up, preferred shareholders have a claim upon the company’s net assets prior to common shareholders, but behind the claims of the company’s lenders and bondholders. The preferred shareholders’ claim against assets is often limited to a maximum of the shares par value.
Unlike common shares, preferred shares do not automatically assign voting rights to shareholders. However, most preferred shares do grant shareholders voting rights in the event the company omits dividend payments and for some preferred share issues holders may have the right to vote as a group, or as a class, to elect directors to the board.
Six or seven years ago, most preferred shares were issued as Perpetual or Straight preferred shares, which, unlike other types of Fixed Income investments such as bonds/debentures and Guaranteed Investment Certificates (GICs), do not have a specific maturity date upon which the investor’s capital is returned. Over the last few years, Rate-Reset preferred shares have become the dominant type of share.
Often corporations will add features to a preferred share in order to enhance the share’s appeal to investors. Such features can be any one or a combination as discussed in the FAQ section.
Members' Note: When it comes to investing in Preferred Shares, one of the greatest hurdles investors face is access to information. InvestingForMe provides easy access to detailed descriptions to over 175 individual preferred shares - all of their specific features and characteristics, at a glance. Within our Data Room, simply visit the list of Preferred Shares and click on the share's trading symbol. This will bring up the trading information, chart and a complete description of the preferred share's features and characteristics (Redemption, Retraction, Dividend Rate Resets, Perpetual, Conversions, Exchangeable, Dividend Details and more.)
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