Definition and Examples
A perpetual preferred stock is a type of stock that has no maturity date and pays fixed dividends upon issuance. Perpetual preferred stock is classified into several categories: growth, income, value, and blue-chip stocks. Holders of perpetual preferred stock will receive any dividends before common stockholders.
How Does Perpetual Preferred Stock Work?
Issuers of perpetual preferred stocks often have the ability to redeem the shares. If the perpetual preferred stock is callable, the issuer can redeem the shares. They can then decide whether to offer the shareholder the value of the stock at par (the predetermined face value for redemption at the original issuance) payable in cash or by providing the equivalent value in common shares.
Types of Perpetual Preferred Stock
Perpetual preferred stocks can fall into several categories:
– Growth Stocks: This type of perpetual preferred stock has earnings growth at a rate faster than the market average. Because of this, growth stocks rarely pay dividends, so investors buy these stocks in hopes of capital appreciation. Growth stocks are likely to be found in startup technology companies.
– Income Stocks: If you’re looking for regular dividends, you’ll appreciate that income stocks pay dividends consistently. Investors tend to buy income stocks because they generate regular income. A well-established utility company is a good example of a company likely to have income stocks.
– Value Stocks: With a low price-to-earnings (PE) ratio, value stocks are cheaper to buy than stocks with a high PE. Value stocks can be either growth or income stocks, but the low PE ratio may indicate that they are currently unpopular among investors. Generally, investors buy value stocks because they hope that the market has overreacted and that the price of the value stock will rebound.
– Blue-chip Stocks: Blue-chip stocks usually come from large companies with a strong growth history and generally pay dividends.
Alternatives to Perpetual Preferred Stock
If you are interested in receiving regular dividends, an alternative to investing in perpetual preferred stocks is preferred securities, which are fixed-income investments issued by large insurance companies and banks, and typically pay dividends.
Note: Preferred securities are perpetual and callable (can be redeemed before maturity). They have characteristics of both stocks and bonds, but they also have the potential to provide higher returns for investors than common stocks or corporate bonds.
Advantages and Disadvantages of Perpetual Preferred Stock
Advantages:
– Receive dividends before common stockholders.
– Perpetual preferred stocks have priority over common stockholders if the company goes bankrupt.
Disadvantages:
– Holders of perpetual preferred stocks typically do not have voting rights.
What Does This Mean for Individual Investors?
An important thing for investors to understand about being shareholders of perpetual preferred stock is that if the company goes bankrupt and its assets are liquidated, they will have access to the proceeds before common stockholders. Preferred stockholders are paid after bondholders.
Source: https://www.thebalancemoney.com/what-is-perpetual-preferred-stock-5207212
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