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Answer:
Last
week I answered a question from a BuyandHolder about
the advantages of common stocks that pay dividends
and where you can find lists of these stocks. Click
HERE to read it if you haven't already done so.
There
are other dividend-paying stocks you should know about.
They're called preferred stocks.
A
preferred stock is rather like a bond without a maturity
date. It pays a fixed dividend -- one that does not
rise or fall with the company's profits. And, as the
name implies, it enjoys preferred status over common
stocks. That means, preferred shareholders receive
their dividend payments after the corporation has
paid all bondholders their interest and before dividends
are paid on common shares.
Some
preferreds can be converted into common stock. Some
are rated by Moody's and Standard & Poor's.
Most
preferreds are cumulative preferred shares.
That means if a dividend payment is skipped because
the company suffers losses, it must be paid later
on, when earnings recover and before dividends are
paid on common shares. In other words, the dividends
accumulate until money is available.
There
are also noncumulative preferreds. With this type
of stock, if a dividend is skipped, it is not recovered.
I suggest you avoid noncumulatives.
You
should think of preferred stocks as an income investment
-- one that generally pays a higher dividend than
the common stock of the same company.
Call
provision...
Some
preferreds have a call provision. It allows the company
to redeem or call in the shares, usually at a few
points above par or face value. When the original
issue has a high yield, the company may find it worthwhile
to retire some shares if it can float new debt or
issue new preferred stock at a lower interest rate.
Some
words of caution...
Inflation
and high interest rates can have a significant negative
impact on preferreds. That's because the dividend
is fixed and when rates rise, you are locked in at
the old, lower rate. This type of investment has a
hard time keeping pace with inflation. Not only are
owners of preferreds shut out of rising interest rates,
but also the opportunity for substantial price appreciation
of this type of stock is limited.
However,
we are not in an inflationary mode at this time and
interest rates are at historic lows. This may make
preferreds issued by financially solid companies appealing
for those BuyandHolders seeking a stream of income.
Quality...
If
you decide to add preferreds to your portfolio, select
those that are rated BBB or higher by Standard & Poor's
or Baa or higher by Moody's. If the preferred is not
rated, make certain it is issued by a company with
little or no debt.
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