Classes of Preferred Stock
Corporations that offer preferred stock often have different issues outstanding at any one time, each with different qualities and degrees of preference. One of the issues, for example, is usually designated to have the highest priority to receive dividends. Prior preferred stock has first call on dividends in case a company has insufficient funds to meet the dividend payment of all preferred classes. Preference preferred stock receives preference over all other classes of the company’s preferred except for prior preferred. If a company offers more than one issue of preference preferred, then the various issues are ranked by their relative seniority. Because its dividend payments are relatively more secure, prior preferred stock usually has a lower yield than the other classes of preferred stock.
Besides degree of preference, different issues of preferred shares vary in the quality of their rights to dividends. Cumulative preferred stock allows dividends to accumulate when a payment is not made. If a corporation misses a dividend payment, it will have to pay the accrued dividend the next time it offers one, before it pays common stockholders. Non-cumulative preferred stock does not accrue unpaid dividends. Few companies issue such shares since they are unattractive to investors, but terms may sometimes be added to improve their value, such as fixing the number of allowable missed payments or automatically granting voting rights when a payment is missed.
Participating preferred stock allows investors to receive extra dividends when the company exceeds some predetermined financial goals. Investors will always receive their regular dividend but may also participate in a company’s accelerated growth. Participating preferred also often receives a greater claim during liquidation than non-participating preferred. For example, participating preferred may receive 120% of its invested