What is a Preferred Stock?

A preferred stock is a security that represents part-ownership in a listed company. Preferred stock usually does not entitle its holders to voting rights. Preferred stock holders get a fixed amount dividends declared by the company that does not fluctuate, unlike a common stock. Therefore, preference stock can be thought of a hybrid between bond and stock. Preferred stock holders have a higher priority over common stock holders in terms of ownership structure.

A preferred stock can have dividends that are either cumulative or non-cumulative.

If the dividend is cumulative, the company must pay all unpaid preferred dividends accumulated during previous periods before it can pay dividends to common stockholders. If the company is unable to fulfil its dividend obligations, the preferred stockholders may have the right to force a liquidation of the company.

If the dividend is non-cumulative, the company does not have to pay the holder any unpaid or omitted dividends. If the company chooses to not pay dividends in a given year, the holder does not have the right to claim any of those forgone dividends in the future.

A preferred stock can also be perpetual. A perpetual preference stock means that, unlike a bond, there is no maturity period for which the issuer will redeem back the stock. However, the issuer may have the option to redeem back the stocks after a certain period of time, depending on how the stock is structured.

A preferred stock can either be convertible or non-convertible. A convertible preferred stock allows its holders to exchange for a pre-determined number of the company’s common stock. A non-convertible preferred stock, as the name suggests, does not allow conversion into the company’s common stock.

An example of a preferred stock would be Hyflux Preference Share (SGX: N2H). It has a dividend yield of 6% and it is cumulative, non-convertible, non-voting and is perpetual.

Preferred stock is also called “preferred share”, “preference share” or simply “preferred”.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.