Preferred Stock - Types

Types

In addition to straight preferred stock, there is diversity in the preferred stock market. Additional types of preferred stock include:

• Prior preferred stock—Many companies have different issues of preferred stock outstanding at one time; one issue is usually designated highest-priority. If the company has only enough money to meet the dividend schedule on one of the preferred issues, it makes the payments on the prior preferred. Therefore, prior preferreds have less credit risk than other preferred stocks (but usually offers a lower yield).
• Preference preferred stock—Ranked behind a company's prior preferred stock (on a seniority basis) are its preference preferred issues. These issues receive preference over all other classes of the company's preferred (except for prior preferred). If the company issues more than one issue of preference preferred, the issues are ranked by seniority. One issue is designated first preference, the next-senior issue is the second and so on.
• Convertible preferred stock—These are preferred issues which holders can exchange for a predetermined number of the company's common-stock shares. This exchange may occur at any time the investor chooses, regardless of the market price of the common stock. It is a one-way deal; one cannot convert the common stock back to preferred stock.
• Cumulative preferred stock—If the dividend is not paid, it will accumulate for future payment.
• Exchangeable preferred stock—This type of preferred stock carries an embedded option to be exchanged for some other security.
• Participating preferred stock—These preferred issues offer holders the opportunity to receive extra dividends if the company achieves predetermined financial goals. Investors who purchased these stocks receive their regular dividend regardless of company performance (assuming the company does well enough to make its annual dividend payments). If the company achieves predetermined sales, earnings or profitability goals, the investors receive an additional dividend.
• Perpetual preferred stock—This type of preferred stock has no fixed date on which invested capital will be returned to the shareholder (although there are redemption privileges held by the corporation); most preferred stock is issued without a redemption date.
• Putable preferred stock—These issues have a "put" privilege, whereby the holder may (under certain conditions) force the issuer to redeem shares.
• Monthly income preferred stock—A combination of preferred stock and subordinated debt
• Non-cumulative preferred stock—Dividends for this type of preferred stock will not accumulate if they are unpaid; very common in TRuPS and bank preferred stock, since under BIS rules preferred stock must be non-cumulative if it is to be included in Tier 1 capital.