Preferred stock lives up to its name

Q: Can you explain the major differences between preferred stock and common stock?

Dividends on common stock are not guaranteed. On a quarterly basis, the company decides whether it will pay a dividend, and if so, how much it will be per share. Some companies reinvest potential dividends to fund research, development, and other areas that may provide higher long-term shareholder value.

Preferred stock also represents proportionate ownership in a publicly traded company. It differs from common stock in the amount and the manner in which dividends will be received. Ownership of preferred stock carries a promise from the company to pay a specified dividend amount per share, regardless of the profitability of the company. This specified dividend must be paid to preferred stock shareholders before any dividends can be paid to common stock shareholders.

Most preferred shares are considered cumulative, that is, in the event a company has a lack of earnings, dividends are not paid to any shareholders, common or preferred. At the time when the company again begins to pay dividends, preferred shareholders must receive the cumulative total of past unpaid dividends before the common shareholders receive any dividends. Preferred stock is particularly advantageous for investors who want a more predictable and higher income flow than would be generated by the same company's common stock.

Joel M. Blau, a Certified Financial Planner, is president of MEDIQUS Asset Advisors, Inc. in Chicago. He can be reached at 800-883-8555 or blau@mediqus.com
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