Prior-Preferred Stock, also known as Preference Shares, is a type of Preferred Stock that holds a superior rank over other issues of Preferred Stock and Common Stock regarding dividend payments and claims on assets. In the event of liquidation, Prior-Preferred Stocks are prioritized before other forms of equity.
Key Characteristics
Dividend Payments
Prior-Preferred Stocks generally offer fixed dividends, meaning the dividend amount is predetermined and is paid out regularly. These dividends hold precedence over dividends to other preferred shareholders and common shareholders.
Claim on Assets
In the unfortunate event of liquidation, holders of Prior-Preferred Stocks have a higher claim on the company’s remaining assets compared to holders of other Preferred Stocks and Common Stocks. This feature provides an added layer of security to Prior-Preferred Stockholders.
Types of Preferred Stock
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Cumulative Preferred Stock: Holders are entitled to receive missed dividend payments before any dividends are paid to common shareholders.
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Non-Cumulative Preferred Stock: Holders are not entitled to missed dividend payments.
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Convertible Preferred Stock: Can be converted into a predetermined number of common shares.
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Callable Preferred Stock: Can be redeemed by the issuing company before its maturity date.
Special Considerations
Potential for Higher Yields
Given their priority in dividend payments and asset claims, Prior-Preferred Stocks generally offer slightly lower yields compared to other types of preferred stocks. However, their risk is also lower because of their precedence in the payment hierarchy.
Lower Volatility
Prior-Preferred Stock tends to be less volatile than common stocks due to their fixed dividend nature and priority in payments, making them attractive to conservative investors.
Historical Context
The concept of Prior-Preferred Stock has evolved as companies sought ways to attract different kinds of investors by offering varying degrees of risk and return characteristics. These have been especially popular among conservative investors looking for stable income over capital appreciation.
Applicability
Investment Portfolios
Prior-Preferred Stocks are often included in diversified investment portfolios aimed at income generation. Due to their reliable stream of fixed dividends and lower risk profile, they are attractive to retirees and income-focused investors.
Corporate Finance
Corporations may issue Prior-Preferred Stock to raise capital without giving up control, as these do not carry voting rights. They also make the company’s capital structure more intricate, allowing for different layers of equity to meet various investor needs.
Comparisons
Prior-Preferred Stock vs. Common Stock
- Dividend Payments: Prior-Preferred Stock dividends are fixed and prioritized, whereas Common Stock dividends are variable and paid only after preferred dividends.
- Risk: Prior-Preferred Stocks generally involve less risk compared to Common Stocks.
- Voting Rights: Common Stock typically comes with voting rights, while Prior-Preferred Stock does not.
Prior-Preferred Stock vs. Other Preferred Stock
- Ranking: Prior-Preferred Stock ranks higher in terms of dividend payments and asset claims.
- Yield: Typically, Prior-Preferred Stock offers lower yields compared to other preferred stocks due to the higher level of safety.
Related Terms
- Cumulative Dividend: A feature in some preferred stocks where missed dividend payments accumulate.
- Liquidation Preference: The order in which shareholders are paid from the company’s assets upon liquidation.
- Par Value: The face value of a bond or a stock.
FAQs
What are the main benefits of Prior-Preferred Stock?
Does Prior-Preferred Stock carry voting rights?
How does the yield of Prior-Preferred Stock compare to other investments?
References
- “The Intelligent Investor” by Benjamin Graham
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen.
- Investopedia: Prior-Preferred Stock
Summary
Prior-Preferred Stock represents a secure form of investment in the hierarchy of equity, holding precedence in both dividend payments and claims on assets in the event of liquidation. This makes it a favored choice among conservative investors seeking stable income with lower risk.
