today we're going to look at preferred
stocks we are also going to look at
three risks to consider when investing
in preferred after we go over the three
risks I'm going to bring out one very
important point we should consider when
investing in preferred stocks okay let's
get started so what is a preferred stock
imagine stocks and bonds got together
and had a baby that baby would be a
preferred stock preferred stocks have
features of both stocks and bonds they
are similar to bonds because they
generally pay a fixed dividend amount
for example let's pretend a company
issues a preferred stock that preferred
stock is going to cost the investor $25
and let's assume that the company
declares that this particular preferred
will pay a $1 dividend each year that
means that this preferred stock will
have a 4% dividend yield a dividend
yield is calculated by dividing the
annual dividend by the price of the
stock so here would be $1 divided by $25
now if you're familiar with bonds you
will see that this is a very similar
concept if you're not too familiar with
bonds watch our bond investment video
which I'll leave in the link below so
functionally the dividends of preferreds
work very similar to bonds but they are
also similar to stocks and that owning a
preferred share also represents
ownership in the company just like
stocks do preferred shares have the
advantage of a common and that they are
higher up in the pecking order what do I
mean by that if the company every one
bankrupt the assets of the company would
be sold off and the investors would get
paid first the bond investors get paid
then preferred investors get paid and if
there's anything left common
shareholders would be paid on the flip
side one disadvantage of owning
preferreds is that preferred
stockholders do not get any voting
rights like common shareholders do this
brings us to our three risks to consider
when investing in preference first if a
company ever faced financial trouble
before they caught the interest payments
to bondholders they're going to cut the
dividend payment for preferred
shareholders
there's a certain type of preferred
called a cumulative preferred
accumulative preferred means that if a
company skips a dividend payment owed to
the preferred shareholders they must
make it up before they pay any common
shareholder dividends a second risk is
low trading volume if you ever wanted to
buy or sell a lot of preferred shares
you could run into trouble because there
may not be many available and you may
end up being forced to pay a slightly
higher price a third risk is rising
interest rates so in our example we paid
$25 for a preferred that paid a 4% yield
or one dollar a year that 4% will always
be that way because you paid $25 for
Bloods imagine rates rise and now is
easy to buy a different investment that
paid let's say a 6% yield many people
are likely to sell their preferreds and
reinvest it in something that pays a
quote better dividend this is likely to
drive the price of the preferred lower
at the start of the video I mentioned
that there was an important
consideration when it comes to preferred
investing and that is be aware of the
type of companies that issue prefers the
majority of preferreds come from
companies in the financial sector now
this is important to know because if
you're trying to build a portfolio and
you allocate a portion of your portfolio
to preferreds and then allocate a
separate portion to the financial sector
you need to be aware that many of the
risks involved in investing in the
financial companies will likely hold
true for the preferred investments as
well if you have any questions about the
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you
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