Preferred ownership. To be “preferred” means a couple of things. It might mean you get to the front of the line or that you get special treatment. But, as with all things, being preferred can have costs and unique risks. Most people know about common stock. Common stock in PSA (Public Storage) provides a quarterly dividend yield of 3.67%. You can also buy preferred stocks using an ETF like PFF (iShares Preferred and Income Securities). One of the holdings in PFF is Citigroup Bank’s “Citigroup Inc Deposit shares 6 7/8 % Non-Cum Perp Pfd Shs Series CPK.
PSA (Public Storage) also has preferred shares. Two examples from Fidelity’s web site are: PSA/PV and PSA/PW. These have a face value of $25 per share and can trade at a price higher than or lower than $25. When looked at PSA/PW, the price for the most recent trade was $24.81. But bear in mind that PSA can “call” the shares and pay you the $25 at any time. The current yield on PSA/PW is 5.27%.
So why might an investor need to know before buying preferred shares?
- First, preferred stock is stock entitling the owner of the preferred shares to a fixed dividend, whose payment takes priority over that of common-stock dividends. If dividends will be cut or reduced the common stock holders will feel the pain first.
- Preferred stocks might be called by the company. In other words, whether you want to sell or not, you might have the company buy your shares back without your permission or any recourse.
- You don’t want to pay too much for preferred shares. Typically, each share is $25. Bear that in mind when you place an order to buy preferred stocks.
- You probably want to know the credit rating of the issue in question. Don’t buy junk. Moody’s and S&P rate the credit quality of preferred stocks and you can see this on Fidelity’s web site. A simple way to answer the question is “does the common stock show the right fundamentals for earnings and growth?” If the answer is yes, then the preferred shares are probably a reasonably safe investment.
- Don’t expect the price of the preferred shares to go up or down much. It is similar to a bond.
If you want to learn more about preferred stocks or ETF’s, here is a good place to start: