The Rising Influence of Rising Affluence

[DewDiligence]

Re: Preferred stock

I have a question with regards to shares of "Preferred Stock". They seem to be similar to bonds but often carry a much higher yield. Why? Do they carry hidden risks?

Owning preferred stock is riskier than owning a bond from the same company for two reasons:

1) Bondholders get paid ahead of preferred (and common) stockholders in the event of a bankruptcy liquidation; and

2) The interest payments on bonds are legal obligations of the issuing company, but the dividend payments on preferred stock are not. I.e., a company in financial trouble can legally reduce the preferred dividend or terminate it altogether.