How To Find Preferred Dividends

How to Find Preferred Dividends: A complete walkthrough for Investors

Finding preferred dividends can be a rewarding strategy for income-seeking investors, offering a potentially higher and more stable yield compared to common stocks. Even so, navigating the world of preferred stocks requires understanding their unique characteristics and knowing where to look for opportunities. This practical guide will equip you with the knowledge and tools to effectively search for and evaluate preferred dividends.

Understanding Preferred Stock and its Dividends

Before diving into the search process, let's establish a solid understanding of preferred stock. Plus, preferred stock represents an ownership stake in a company, but it sits above common stock in the capital structure. This means preferred shareholders have priority over common shareholders in receiving dividends and assets in the event of liquidation.

Key Characteristics of Preferred Stock:

• Dividend Priority: Preferred shareholders receive dividends before common shareholders. If the company doesn't have enough earnings to pay all dividends, common shareholders may receive nothing while preferred shareholders still get theirs (though this depends on the specific terms of the preferred stock).
• Fixed Dividend Rate: Preferred stocks typically pay a fixed dividend rate, often expressed as a percentage of the par value. This provides a degree of predictability for income generation. On the flip side, some preferred stocks have cumulative features, meaning unpaid dividends accumulate and must be paid before common shareholders receive any dividends. Others are non-cumulative, meaning missed dividends are lost.
• No Voting Rights: Generally, preferred shareholders do not have voting rights in company matters, unlike common shareholders. This is a trade-off for the priority dividend payments.
• Maturity Date: Some preferred stocks have a maturity date, meaning they are redeemed by the company at a specified price on that date. Others are perpetual, meaning they have no maturity date.

Types of Preferred Dividends:

Understanding the different types of preferred dividends is crucial for your search. These variations impact the risk and potential return:

• Fixed-Rate Preferred Dividends: These offer a consistent dividend payment at a predetermined rate. They are generally less volatile than other types but may offer lower yields.
• Floating-Rate Preferred Dividends: The dividend rate on these stocks adjusts periodically based on a benchmark interest rate, such as LIBOR (now SOFR) or a treasury rate. This provides some protection against inflation but introduces more uncertainty regarding the income stream.
• Participating Preferred Dividends: These offer the potential for additional dividends beyond the stated rate, typically if the company performs exceptionally well. This adds complexity but potentially enhances returns.
• Cumulative Preferred Dividends: As mentioned earlier, missed dividends accumulate and must be paid before any common dividends are distributed. This offers greater security for income, but the company may need to prioritize these payments over other investments.
• Non-Cumulative Preferred Dividends: Missed dividends are not accumulated, resulting in lower risk but also less security of income.

Where to Find Preferred Stock Information

Locating information on preferred stocks requires a multi-faceted approach. Here are some key resources:

1. Brokerage Platforms: Most online brokerage accounts provide comprehensive tools for screening and researching stocks, including preferred stocks. You can filter by dividend yield, maturity date, and other relevant criteria. Look for features like:

• Stock Screeners: Use these tools to filter for preferred stocks based on your desired characteristics (e.g., high dividend yield, specific industry, maturity date).
• Financial Statements: Access the company's financial statements to assess its financial health and dividend-paying capacity.
• Analyst Ratings: Review analyst reports and ratings to gain insights into the company's prospects and the risk associated with its preferred stock.

2. Financial News Websites and Databases: Reputable financial news sources often publish articles and data on preferred stocks. These sources can provide valuable insights into market trends and individual company performance. Look for:

• Dedicated Preferred Stock Sections: Some websites have sections specifically dedicated to preferred stock analysis and information.
• Company News: Stay updated on any relevant news that might impact a preferred stock's dividend payment or value.

3. Company Investor Relations Websites: Companies often have investor relations sections on their websites that provide detailed information about their preferred stock, including dividend history, payment dates, and terms. This is a primary source of information.

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4. SEC Filings (EDGAR Database): The Securities and Exchange Commission (SEC) requires companies to disclose financial information publicly. The EDGAR database allows you to access these filings, including information related to preferred stock offerings and dividend payments. This is a crucial resource for in-depth analysis.

Evaluating Preferred Stock for Dividend Potential

Finding a preferred stock with a high dividend yield is only the first step. Thorough evaluation is crucial to minimize risk and maximize potential returns:

1. Dividend Coverage Ratio: This ratio indicates a company's ability to cover its preferred dividend payments from its earnings. A ratio significantly greater than 1 suggests a healthy ability to pay dividends. Calculate it using this formula:

• Dividend Coverage Ratio = Earnings Available for Preferred Dividends / Preferred Dividends Paid

2. Financial Strength of the Issuer: Analyze the company's overall financial health through its balance sheet, income statement, and cash flow statement. Look for indicators of strong financial stability, such as a low debt-to-equity ratio and positive cash flow.

3. Credit Rating: Check the credit rating of the company issuing the preferred stock. A higher credit rating suggests a lower risk of default on dividend payments.

4. Call Provisions: Some preferred stocks have call provisions, allowing the company to redeem the stock at a predetermined price. While this offers the possibility of early repayment, it can also interrupt the dividend stream if the company chooses to call the stock.

5. Market Price and Yield to Maturity (YTM): Consider the current market price of the preferred stock and calculate the yield to maturity, particularly for preferred stocks with a maturity date. This will help you compare potential returns against other investments. YTM can be approximated using financial calculators or spreadsheet software.

Strategies for Finding Preferred Dividends

1. Screening for High-Yield Preferred Stocks: Use your brokerage platform's stock screener to filter for preferred stocks with high dividend yields. Remember to consider the factors mentioned above before investing in these stocks. High yields often come with higher risks.

2. Sector-Specific Search: Some sectors are known for issuing preferred stocks with attractive dividend yields. Focusing your search on specific sectors (e.g., real estate, utilities) might yield better results.

3. Focusing on Cumulative Preferred Stocks: If income consistency is your primary goal, prioritize cumulative preferred stocks, as unpaid dividends accumulate and must eventually be paid.

4. Diversification: Diversify your preferred stock portfolio across different issuers and industries to manage risk. Avoid over-concentration in any single company or sector.

5. Regular Monitoring: Keep a close eye on the financial performance of the companies whose preferred stocks you own, along with any changes in market conditions. Be prepared to adjust your portfolio as needed. That alone is useful.

Frequently Asked Questions (FAQ)

Q: Are preferred dividends taxed differently than common stock dividends?

A: Yes, the tax treatment of preferred dividends depends on your tax situation and the specific type of preferred stock. It's best to consult a tax professional for personalized advice. Generally, they are taxed as ordinary income, not qualified dividends like some common stock dividends.

Q: What happens if a company goes bankrupt?

A: In the event of bankruptcy, preferred stockholders have priority over common stockholders in receiving assets. Even so, there is no guarantee of receiving any funds. The exact payout depends on the company's liquidation process and the amount of assets available for distribution.

Q: How often are preferred dividends paid?

A: Preferred dividends are typically paid quarterly, although this can vary based on the specific terms of the stock.

Q: Can preferred stock prices fluctuate?

A: Yes, even though preferred stocks generally offer more predictable dividend payments, their market prices can fluctuate based on market conditions, interest rate changes, and the company's financial performance.

Conclusion

Finding preferred dividends requires careful research, a solid understanding of preferred stock characteristics, and diligent evaluation. Because of that, diversification and thorough due diligence are crucial to building a successful preferred stock portfolio. By using the strategies and resources outlined in this guide, you can enhance your ability to identify and analyze potential preferred stock investments that align with your risk tolerance and income goals. Remember that while higher yields can be attractive, they often come with higher risks. Always consult with a qualified financial advisor before making any investment decisions.