Page 193 - A Canuck's Guide to Financial Literacy 2020

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Preferred Shares

Preferred shares are stock issued by a corporation that represents a claim on the assets.
They’re considered a hybrid investment as they have equity and fixed income
characteristics. In terms of equity characteristics, preferred shares trade on an exchange
and have no fixed maturity. They’re noted down on the equity side of a company’s balance
sheet. Fixed income characteristics include the fact that preferred shares pay fixed
dividends, have a par value and carry no voting rights. Holders of preferred shares are
prioritized over those holding common shares.

Features of Preferred Shares

Dividends

Preferred shares pay a dividend, stated as a percentage of the $25 par value. The dividend
rate on the shares are set when the shares are first issued. The dividend rate can be based
on a fixed rate, reference rate or floating rate. In terms of a reference rate, 5 Year
Government of Canada Bond or 3-Month Government of Canada Treasury Bill Rate may be
used. Floating rate may cause the dividend amount to vary as it moves in line with current
market conditions. The dividend that you would receive from Preferreds would depend on
the type of share you’re holding, discussed below.

Perpetual & Callable

One interesting feature of preferred shares is that they don’t have a maturity date as bonds
do. However, they be re-called at set intervals or prices by the issuer. Usually, every 5
years, the issuer may recall the shares or issue a new preferred share. Preferreds are often
recalled when a company can refinance the shares at a lower dividend rate.

Capital Structure

On the hierarchy of a company’s capital structure, preferred shares are higher than
common shares but behind bondholders in a claim for distributions. In event of bankruptcy,
the bondholders will have first claim on assets, followed by preferred shareholders, then
common equity shareholders. Before common shareholders are paid a dividend, preferred
shareholders must be paid first. As well, keep in mind that dividends on preferred shares
are cumulative. If a dividend is not paid in one quarter, it gets added to the second quarters
dividend.