Preferred Stock - Features

Features

Preferred stock is a special class of shares which may have any combination of features not possessed by common stock. The following features are usually associated with preferred stock:

• Preference in dividends
• Preference in assets, in the event of liquidation
• Convertibility to common stock.
• Callability, at the option of the corporation
• Nonvoting

In general, preferreds have preference to dividends payments. A preference does not assure the payment of dividends, but the company must pay the stated dividend rate before paying dividends on common stock.

Preferred stock may be cumulative or noncumulative. A cumulative preferred requires that if a company fails to pay a dividend (or any amount) below the stated rate, it must make up for it at a later time. Dividends accumulate with each passed dividend period (which may be quarterly, semi-annually or annually). When a dividend is not paid in time, it has "passed"; all passed dividends on a cumulative stock make up a dividend in arrears. A stock without this feature is known as a noncumulative, or straight, preferred stock; any dividends passed are lost if not declared.