Preferred Stock Investment Guide: Hidden Options for Stable Dividends, Which Taiwan Stocks Are Worth Watching?

In an era where inflation continues to erode asset value, more and more investors are seeking investment tools that lie between bonds and stocks. Bonds have high thresholds, and common stocks are too volatile. Is there an option that combines stable cash flow with price stability? The answer is Preferred Stocks. Today, we will delve into what preferred stocks are, how they work, and which specific targets in the Taiwan stock market are worth paying attention to.

What are Preferred Stocks? How are they different from Common Stocks?

Basic Concept Differences

When mentioning stocks, most people think of common stocks, which represent ownership in a company. Common stock shareholders may receive dividends when the company profits, but they also face the risk of no dividends during tough times.

What are preferred stocks? They are a hybrid security, positioned between stocks and bonds. The key difference is: preferred stocks specify the dividend amount or rate for each upcoming year at the time of issuance. This means that when the company’s earnings are limited, preferred stockholders have priority over common stockholders in receiving dividends.

Preferred Stocks vs Common Stocks: Full Comparison

Various Classifications of Preferred Stocks

Investors need to understand the complexity of preferred stocks—they have more variants than common stocks. Based on different features, they can be divided into the following categories:

Perpetual vs Non-Perpetual: Perpetual preferred stocks have no maturity date; investors receive fixed dividends indefinitely. Non-perpetual preferred stocks have a clear maturity or redemption date.

Cumulative vs Non-Cumulative: When a company incurs losses and suspends dividend payments, cumulative preferred stocks accumulate unpaid dividends and prioritize paying them back once profits resume. Non-cumulative preferred stocks do not have this right; missed dividends are not compensated.

Participating vs Non-Participating: In years of excess profits, participating preferred stocks can receive additional distributions alongside dividends for common stocks, while non-participating preferred stocks do not.

Convertible vs Non-Convertible: Some preferred stocks include conversion clauses, allowing investors to convert them into common stocks during specific periods, usually linked to stock performance.

Redeemable vs Non-Redeemable: If preferred stocks include redemption clauses, issuing companies can buy them back at the original issuance price after a set period, affecting long-term investment planning.

Current Status and Selection of Preferred Stocks in the Taiwan Market

The number of preferred stocks in Taiwan is far fewer than common stocks, so investment options are relatively limited. To find information on Taiwan preferred stocks, you can visit professional websites like findbillion.com, where the preferred stock analysis module is available under the Taiwan stock classification.

For example, Taiwan Cement’s preferred stocks: issued in December 2018, with an issuance price of NT$50, fixed dividend of NT$1.75, dividend rate of 3.5%, non-cumulative. Such information is crucial for evaluating whether preferred stocks meet your investment needs.

Some well-known preferred stocks in the market include:

• Shin Kong Financial Holding’s A preferred〈2888A〉 and B preferred〈2888B〉: both with dividend rates over 5%. Shin Kong Financial is stable, with no short-term loss risks, and relatively solid dividend guarantees.
• Yuanta Taiwan Preferred Stock Hybrid High Dividend 20 Index Securities〈020008〉: tracks Taiwan preferred stocks via ETF, diversifies risk, suitable for investors who prefer not to research individual stocks.

Advantages and Disadvantages of Preferred Stock Investment

Investment Advantages

Stable and predictable dividends: Preferred stocks have fixed dividend rates set at issuance; unless the company incurs losses, dividends are guaranteed, facilitating long-term financial planning.

Lower price volatility: Due to stable dividends, preferred stock prices usually fluctuate much less than common stocks, attracting institutional investors and risk-averse investors.

Priority in bankruptcy liquidation: Preferred stockholders have higher claims than common stockholders during company liquidation, reducing risk.

Investment Disadvantages

Limited upside potential: When the company’s performance surges, dividends remain fixed; common stockholders benefit most from growth, while preferred stocks cannot fully participate.

Limited capital appreciation: Since preferred stocks are more bond-like, their price appreciation potential is capped and cannot keep pace with rapid growth in the company’s stock price.

Early redemption risk: If preferred stocks include redemption clauses, issuing companies may buy them back early when market interest rates fall or cash flow improves, disrupting long-term plans.

No voting rights: Preferred stockholders usually cannot participate in shareholder meetings or corporate governance.

Recommended Strategies for Preferred Stock Investment

Suitable for: Investors with low risk tolerance seeking stable cash flow, such as retirees or institutional investors.

Selection tips: Before investing, confirm whether preferred stocks include redemption clauses, conversion options, cumulative features, etc., as these impact return stability.

Convenient options: If you lack time for detailed individual stock research, purchasing preferred stock-themed ETFs is a more straightforward approach, providing exposure to multiple preferred stocks and automatic risk diversification.

Conclusion

What are preferred stocks? In short, they are a low-risk, stable-yield hybrid investment tool. Compared to the volatility and growth potential of common stocks, preferred stocks sacrifice flexibility and upside elasticity but offer predictable cash flow and relatively stable prices.

In an environment of rising interest rates and persistent inflation expectations, understanding and properly allocating preferred stocks can strengthen your investment portfolio’s resilience. The key is to tailor your choices based on your risk appetite and investment horizon.