Can preferred stock enhance your portfolio?
Before racing to include preferred stock in your portfolio, it is critical to understand the structure of preferred stock issues. Preferred stocks are technically equity investments, despite paying a fixed dividend, since they are subordinated to all debt issued by a corporate issuer. In the event of bankruptcy, a company’s assets would first go to debt holders, then to preferred stockholders and lastly common equity holders.
However, even though common shareholders are paid after preferred stockholders, preferred stockholders don’t share in the growth of the company like common equity holders since the economic benefit received on preferred stock is contractually fixed at the time of issuance. Thus, preferred stockholders receive a bond-like benefit but bear more credit risk than typical debt holders and don’t receive nearly as much potential economic benefit as common stockholders.