What is a Company's Preferred Stock?

Preferred stock is a type of stock issued by a corporation that grants shareholders certain preferential rights.

Holders of preferred stock have priority over common stockholders when it comes to profit distribution and company liquidation.

This means that preferred stockholders receive dividend payments before common stockholders and have priority in the distribution of remaining assets during liquidation.

Preferred stock typically does not carry voting rights, so holders cannot participate in company management decisions. The dividends on preferred stock are usually fixed, similar to bond interest, which gives preferred stock characteristics of both stocks and bonds.

Preferred stock has several distinctive features, such as:

If a company’s profitability declines, dividends can be deferred to the next period for cumulative payment, a feature not available to common stock;
Preferred stockholders can convert their preferred shares into common stock;
If the company’s stock price drops significantly, the dividends on preferred stock are less affected;
An increase in the number of shares will not dilute the price of preferred stock;

These features ensure that preferred stockholders receive relatively stable dividend income, making the preferred stock an attractive investment for those seeking steady income.

Overall, preferred stock does not offer the potential for significant gains or losses like common stock, does not grant voting rights on company matters, and does not provide the same guarantees as bonds. If the company’s profits are not satisfactory, preferred stock dividends may not be paid.

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Preferred Stock vs Common Stock

Preferred stock and common stock are both types of equity securities issued by a company, but they have distinct differences in terms of issuance, dividend payments, and other aspects.

In terms of debt hierarchy, preferred stock ranks higher than common stock but lower than the company’s bonds.

This means that preferred stockholders receive dividends before common stockholders after the company repays its debts, whereas common stockholders only receive what’s left after all obligations are met.

Additionally, preferred stock has the characteristic of deferred payment. When a company faces financial difficulties, it can temporarily suspend the payment of preferred stock dividends and later pay the accumulated unpaid dividends once profits recover. However, common stock dividends are not retroactively paid.

The returns on preferred stock are usually relatively fixed, either as a fixed percentage or a fixed amount of the face value of the preferred stock, or with slight fluctuations based on market interest rates.

However, preferred stock does not benefit from the significant market fluctuations that can affect common stock. While preferred stock can be converted into common stock, common stock cannot be converted into preferred stock.

The following table shows the differences and connections between preferred stock and common stock:

	Preferred Stock	Common Stock
Purchase Price	Fixed price	Market price
Purchase Quantity	Fixed number of shares	Purchased according to the investor’s needs
Dividend	It could be a fixed percentage of the stock’s face value, a fixed amount, or slightly adjusted based on market interest rates	Set by the company
Profit/Loss Volatility	Lower volatility	High volatility. Returns fluctuate with the company’s profitability and dividends may not be paid if profitability is limited.
Dividend Payment Priority	Paid after debts are repaid	Paid after preferred stock dividends
dividend Accumulation	Dividends can be deferred and accumulated if the company’s profitability decreases and later paid when profitability improves	No dividend accumulation
Convertibility	Can be converted into common stock	Cannot be converted into preferred stock
Dilution	Not diluted when the number of shares increases	The value of each share is diluted as the number of shares increases
Redeemability	Preferred stockholders have the right to redeem shares at a predetermined amount	No right to redeem shares at a predetermined amount
Voting Rights	No voting rights	Granted voting rights

How to Check if a Public Company Issues Preferred Stock?

Not all publicly listed companies issue preferred stock. Here’s how you can check for preferred stock issued by a company, using Bank of America (BOA) as an example.

There are two methods to look up preferred stock issued by a public company:

The company’s investor relations website
The company’s financial reports

Using the Company’s Investor Relations website

First, you can search on google.com by entering “preferred stocks of Bank of America” to find the currently issued preferred stock by Bank of America.

From the search results, visit the BOA Investor website. On Bank of America’s investor portal, you can find the following information:

The information is presented in columns:

NAME: The name of the preferred stock.
CUSIP: The registration serial number of the preferred stock.
TICKER: The stock ticker symbol for the preferred stock.
ISSUE DATE: The date when the preferred stock was issued.
PER ANNUM DIVIDEND RATE: The dividend rate, usually a specific percentage of the stock’s face value or adjusted based on market interest rates. SOFR refers to the Secured Overnight Financing Rate, which is based on the U.S. Treasury’s overnight repurchase agreements. BPS (Basis Points) is a common unit of measure in finance used to express percentage changes in financial instruments; a 1% change equals 100 basis points, and 0.01% equals 1 basis point.
DIVIDEND PAYMENT DATES: The dates when dividends are paid.
DIVIDEND TYPE: The type of dividend, which can be Cumulative or Non-cumulative. Cumulative preferred stock accumulates unpaid dividends during periods of insufficient profitability, which are paid out when the company’s profitability improves. Non-cumulative preferred stock does not accumulate unpaid dividends.
CALLABLE ON OR AFTER: Indicates whether the stock is convertible and, if so, the date after which conversion is possible. If it is Non-callable, the preferred stock cannot be converted into common stock; otherwise, a date will be provided after which shareholders can choose to convert their preferred stock into common stock.

Reviewing the Company’s Financial Reports

You can check Bank of America’s Financial reports through the SEC’s website to find information on the profitability of its preferred stock within the financial year.

For example, in Bank of America’s annual report for the year ending December 31, 2023, you can find an overview that includes the names of all preferred stocks, dividends, whether they are cumulative, stock symbols, and the exchange where they are listed.

In the Consolidated Statement of Changes in Shareholders’ Equity within the financial report, you can see that:

In the 2022-2023 financial year, Bank of America spent $1,649 million on preferred stock dividends.

BOA Consolidated Statement of Changes in Sharesholders Equity

What Are the Pros and Cons of Investing in Preferred Stock?

Preferred stock, like other financial investment products, has its advantages and disadvantages for investors.

Pros

Priority in Dividend Payments: Preferred stockholders receive dividends before common stockholders. Especially when a company’s earnings are limited, preferred stockholders can receive all or most of the dividend distribution, while common stockholders might only receive a portion or none at all.
Fixed or Slightly Fluctuating Dividends: The dividends on preferred stock are usually fixed or subject to only slight fluctuations. Therefore, when the company’s stock price experiences significant volatility, especially downward, the impact on preferred stockholders’ returns is minimal.
Right to Redemption at a Predetermined Price: Preferred stockholders have the right to request redemption of their shares at a predetermined price. This means they can redeem their shares at the specified price when needed, unlike common stockholders, who do not have the right to set a redemption price; the redemption price is determined by the company.
Protection Against Dilution: When a company issues more shares, the value of the preferred stock is not reduced by the increase in the number of shares. In contrast, the value of common stock can decrease as the number of shares increases.

Cons

Limited Appreciation Potential: Since the dividend rate on preferred stock is relatively fixed, preferred stockholders do not benefit from the significant gains that common stockholders may enjoy from large stock price fluctuations. Therefore, the potential for appreciation in preferred stock is limited.
No Voting Rights: Preferred stockholders do not have voting rights on company matters, which means they cannot participate in the decision-making process, especially in the formulation of strategies for significant company issues.

How to Purchase a Company’s Preferred Stock?

Through a Brokerage Firm or Online Broker

First, you need to open an investment account with a brokerage firm or an online brokerage (e.g., Interactive Brokers, Futu Moomoo, Robinhood ).
Then, use the search function on the broker’s platform to find the company and its preferred stock ticker symbol that you’re interested in.
Once you locate the preferred stock, you can place an order to purchase it, choosing the quantity and price (limit order or market order).

Through an IPO

If a company is issuing preferred stock for the first time (Initial Public Offering or IPO), you can participate in the subscription through a brokerage firm or broker.
You need to research the specific details of the company’s IPO in advance and place your order through the broker during the subscription period.

Through the Open Market

If the company’s preferred stock is already listed and traded on a stock exchange, you can directly purchase it on the secondary market through a broker.
In the open market, the price of preferred stock fluctuates based on market supply and demand, and you can purchase it at the current market price.

Participating in a Company’s Stock Offering

Sometimes a company may offer existing shareholders the opportunity to purchase preferred stock through a rights issue. This usually requires you to already be a shareholder of the company and to subscribe to the preferred stock through the rights offering plan.