Is a preferred stock more like bonds or common stock?
On One Hand: Higher Dividend RateMost preferred stocks pay a much higher dividend rate than common stocks, a characteristic typical of bonds. Additionally, preferred stocks primarily trade relative to the movements of interest rates in the marketplace, rather than based on the performance of the underlying company.On the Other: Preferreds Are Not BondsUnlike bond payments, preferred dividends are not a legal obligation of a company. In the event of a company’s liquidation, bondholders are paid off before preferred stockholders. Most importantly, proceeds from the sale of preferred stock to the investing public are recorded on a company’s balance sheet as equity, not debt like a bond would be.Bottom LineWhile a preferred stock may actually be a form of equity, its primary characteristics are more typical of bonds rather than common stocks.
