Are preferred stocks worth buying? Understand these before deciding to invest

If you are a risk-averse investor and want your money to outperform inflation during high inflation periods, preferred stocks might be a worthwhile option to consider. But before investing, you need to understand what they are and their advantages and disadvantages.

Preferred Stocks vs Common Stocks: What Are the Fundamental Differences?

Common stocks are what we usually refer to as stocks, giving you ownership in a company. However, there’s a problem—dividends are only paid when the company profits, and if the company loses money, you won’t receive any.

Preferred stocks are different. From the moment of issuance, the company commits to paying you a fixed annual dividend. If the company’s earnings are insufficient to pay all shareholders, preferred stockholders have priority in receiving dividends, while common stockholders only get what’s left. That’s why dividends on preferred stocks tend to be more stable.

But note, stability does not mean guaranteed. If the company incurs a loss that year, the board may decide not to pay dividends. However, if you buy cumulative preferred stocks, any unpaid dividends will accumulate and be paid out once the company turns profitable again.

Another key difference is voting rights. Common stockholders can vote on major company decisions at shareholder meetings, while preferred stockholders usually don’t have this right. However, for most individual investors, this doesn’t impact investment returns.

In terms of dividend distribution, preferred stocks are superior to common stocks; but in terms of capital appreciation, common stocks offer more flexibility. When a company grows significantly, the price of common stocks may double, while preferred stocks might not increase much. Preferred stocks are safer, but their return ceiling is clear.

Types of Preferred Stocks

Preferred stocks are more complex than common stocks because their nature is more akin to bonds. Main classification methods include:

Perpetual vs Non-Perpetual

Perpetual preferred stocks have no maturity date; you can hold them indefinitely and continue to receive dividends. Non-perpetual preferred stocks have a clear redemption date, after which the company can buy them back at the issuance price.

Cumulative vs Non-Cumulative

Cumulative preferred stocks accumulate unpaid dividends, which must be paid later; non-cumulative preferred stocks do not accumulate unpaid dividends, and if not paid, you lose that dividend.

Participating vs Non-Participating

In years when the company performs exceptionally well, participating preferred stockholders can receive additional dividends beyond the fixed amount, participating in the company’s extra profits. Non-participating preferred stocks only pay the fixed dividend.

Convertible vs Non-Convertible

Convertible preferred stocks allow you to convert them into common stocks after a certain period, enabling participation in the company’s growth.

Redeemable vs Non-Redeemable

Redeemable preferred stocks mean the company has the right to buy them back at the issuance price after a certain period. Companies often do this when they have ample cash or when interest rates fall, to reduce financing costs.

The Real Pros and Cons of Preferred Stocks

Before investing in preferred stocks, you must recognize their dual nature.

Advantages include:

Stable dividend income can help you weather inflation. Preferred stock prices fluctuate far less than common stocks, making them suitable for investors seeking cash flow for long-term financial planning. Companies issuing preferred stocks are usually large, stable firms with lower bankruptcy risk.

Disadvantages are also evident:

When the company experiences explosive growth, you can’t fully enjoy the growth dividends. Preferred stock prices have limited upside, which is unfriendly to investors seeking capital appreciation. Moreover, if preferred stocks are redeemed early, your long-term investment plan could be disrupted.

Ultimately, preferred stocks are more suitable for investors seeking stable cash flow and with low risk tolerance.

How to Invest in Preferred Stocks in Taiwan Stock Market

The number of preferred stocks in Taiwan is much smaller than common stocks, so options are limited. For specific information, you can check the Taiwan preferred stock list on findbillion.com.

Looking at individual stocks, Shin Kong Financial Holding’s Shin Kong Jin Jia Preferred <2888A> and Shin Kong Jin Yi Preferred <2888B> both have yields over 5%. The issuers are stable, with no short-term loss risks, and preferred stock dividends are relatively secure.

If you prefer not to research individual stocks, buying preferred stock-themed ETFs is a convenient option. For example, Yuanta Taiwan Preferred Stock High Dividend 20 Index ETF <020008> is a good choice, offering diversification and eliminating the need to worry about redemption dates and other details.

Final Advice on Preferred Stock Investment

In short, preferred stocks are a “steady growth” investment tool—you give up the chance for explosive gains in exchange for stable cash flow and lower risk.

When investing, pay close attention to redemption and conversion clauses, as these details directly impact your long-term returns. For investors who don’t want to delve deeply into research, holding preferred stock ETFs is a more worry-free approach.

Finally, remember: although preferred stocks are relatively safe, you should also consider the fundamentals of the issuing companies. Choose preferred stocks issued by stable, cash-rich large enterprises to ensure you can truly enjoy the income with peace of mind.