Preferred Stock Dividend – 7 Critical Elements to Maximize Your Income

Want to buy Preferred Stock for the Stable Income Advantages?

Then you need to know the 7 Ways that Preferred Stock Dividend is Drastically Different (and more profitable) than Regular Stock Dividend.

1. Preferred Stock is Different

Preferred Stock differs from normal or regular stock in the following ways.Increase Dividend Income With Preferred Stock Dividends

  • You get no voting rights at the annual general meeting
  • Callability – The stocks can be called back at any time, and if the Stocks are called back you may miss some of the premium value in the stock, as they will be paid at the Par Value stated in the Financial Prospectus.
  • Preferred stock is, therefore, more like a bond than a regular stock
  • Limited Stock Price Appreciation, typically a preferred stock may fluctuate 10% up or down around the principle price, this is a positive and negative.  Positive for predictability, negative for price appreciation profits.
  • Preferred Stock also tends to pay a significantly higher dividend that normal stocks

2. Preferred Stock Dividend Is Different too!

Whereas normal dividend yield is calculated by dividing the annual dividend per share by the share price on the specific date (dividend ex-date) the preferred dividend yield is very different in the way it is calculation and the increased return it can provide.

3. Regular Dividend Yield Calculator

Calculation – Regular Stock Dividend YieldExample
Dividend Per Share / Current Share Price = Dividend Yield$2 / $40 = 5%

Table 1

4. Preferred Stock Dividend Yield Calculator

Calculation – Preferred Stock Dividend YieldExample
Dividend Rate / Preferred Stock Par Value = Dividend Yield$0.80 / $10 = 8%

Table 2

5. Explaining the Preferred Stock Dividend CalculatorPreferred Stock Dividend Calculator

When the preferred stock is initially offered to prospective investors (specified in the financial prospectus) everything is fixed and set in stone.  The offering is at Par Value.

This means that the intrinsic value of the preferred stock is $10, as in the example above.  The preferred stock value may fluctuate a little but not much, due to the callability of the stock as mentioned previously.

The Dividend Rate is also set in stone in the prospectus, in the example above the dividend rate is $0.80 or 80 cents per preferred share.

6. So how is Preferred Stock Better as a Dividend Investment?

For an Income Investor, you are looking for an investment that presents a better profit that treasury or corporate bonds, or a current account/money market account.  But, you also want the security of an investment similar to a treasury or corporate bond.

Also, due to the fact that preferred stock must accrue dividends if unpaid and legally be paid out before the regular stockholders get their dividends, you are higher up the pecking order and have an increased element of security

Preferred Stock is the bridge between both worlds.

7. Are there any problems to look out for with Preferred Stock Dividends?

Well, there is a  key issue you might want to be aware of.

 1. Market Value is too High

Do not buy a preferred stock at a significantly higher price that it’s Par Value, because this reduces the dividend yield for you specifically.

Your Preferred Stock Dividend Yield depends entirely on what price you purchased the preferred stock on the open market.

Preferred Stock Dividend Yield Calculation Based on Open Market Price

Calculation – Preferred Stock Dividend YieldExample
Dividend Rate / Preferred Stock Price You Paid = Your Dividend Yield$0.80 / $15 = 5.3%

Table 3

In this example, you can see that if you purchased the preferred stock at 50% over the nominal par value price ($15 market price vs $10 Par Value at issuance) then your dividend yield will reduce to 5.3% which is very similar to the regular dividend yield in Table 1.

The downside here is that you overpaid for the preferred stock and will now receive dividends on a par with regular stockholders, but not receive the main benefit regular stockholders have, which is… Long-Term Stock Price Appreciation (increase).

 2. Inflation is too High

In a high inflation situation, for example, inflation is at 9% (something that millennials in the U.S  or U.K. have never witnessed), the preferred stock purchase for dividends may make little sense when compared to Government Bonds.

When you take into consideration Table 2 with a return of 8% compared to inflation of 9% you would actually be losing money.

But as the primary objective of the modern developed world central bank is to control inflation this is not something to worry about in the near to mid-term future.

 3. Are Preferred Stock Dividends Guaranteed?

Preferred Stock Dividends are not guaranteed in the strictest sense.  But you do have certain guarantees.

  1. You will be paid your dividend before regular stockholders
  2. Unlike regular stockholders, your missed dividends will accumulate if a quarter is missed due to bad business performance
  3. Your accumulated dividend will have to be paid before regular stockholders get a dividend.
  4. If the company goes into liquidation you will be behind bondholders but ahead of regular shareholders for a portion of the liquidation value of the company

So, in short not guaranteed, but more likely to receive your payout.

Preferred Stock Dividend Summary

As a retired investor who still want to continue to grow their wealth, or as someone who wants to balance out their portfolio with income generation, preferred stock specifically purchased for dividends are seriously worth considering.

You need to do your calculations up front, but otherwise, enjoy being a preferred investor.

 

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