Every company issues different kinds or classes of stocks at
the same time; giving you choices on what kind of stock you would actually
prefer to own. There can be choices of class 1 common
stocks, class 2 common stocks that only have a certain number of votes per
share, and the class 3 preferred stock.
Having a company’s preferred
stock often offers certain advantages compared to the other classes of
stocks. Of course it’s not all positive, there has to be some kind of balance,
but in this article we’ll be discussing why you should buy preferred stocks when given the option.
Reason #1: Regular dividend
payments
What a preferred stock is has been tackled in the previous
articles, but for a brief explanation, a preferred stock is a hybrid type of
security which has properties of both common stocks and bonds.
Owning a preferred stock means that you will mostly get paid higher and have
more regular dividends than the owners of the company’s common
stock. This means that payment will come in more regularly. Also, the company
has an obligation to pay you back missed preferred dividend payments if any.
Reason #2: In an event of
bankruptcy…
Most preferred stock owners enter the investment due to
attractive dividend yields; sometimes they even surpass that in the bond
markets or the consistent income. But if a time comes that the company files
for bankruptcy, you as a preferred stockholder will have seniority over
claiming of the remaining funds and assets raised through liquidity. You will
be paid before the common stockholders do.
Reason #3: Taxes
A company can claim tax reductions against the amount of interest
paid on bonds but not on dividends paid on preferred stocks. This is due to
dividends on both common and preferred stocks being paid through the company’s
after-tax profit. But there is also tax advantage for certain corporations that
invest in preferred shares in the stock market. The tax favor is referred to as
dividend received deduction. This will prevent the investing corporation from
being overtaxed in a venture.
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