What Is Perpetual Preferred Stock?

Perpetual Preferred Stock Explained in Less Than 5 Minutes

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A perpetual preferred stock is a type of stock with no maturity date that pays a fixed dividend upon issue. Let’s examine how perpetual preferred stocks work, and what shareholders need to know about owning this specific type of stock.

Definition and Examples of Perpetual Preferred Stock

Perpetual preferred stock shares don’t have a maturity date, and pay out a fixed dividend upon issue. Typically, this fixed dividend is declared and paid each quarter if it remains outstanding. If you’re a shareholder of a perpetual preferred stock, you do not have voting rights.

Perpetual preferred stocks are called that because they give shareholders a priority claim when the company distributes or pays out assets to those who own the stock. However, owning perpetual preferred stock does not give preference in any way when it comes to corporate governance. Perpetual preferred stock owners usually don’t get to vote in company elections.

How companies handle these preferred shareholders’ economic preferences varies. For example, some companies may deem that any cash available for distributions during the year must be applied toward promised payments to perpetual preferred stock shareholders before the company can pay out any common dividends. Another company may choose to apply cash cumulatively so that any missed payments go to preferred shareholders before payments are made to common shareholders.

How Perpetual Preferred Stocks Work

The issuers of perpetual preferred stock usually have the ability to redeem the shares. If a perpetual preferred stock share is retractable, the issuer can retract, or call back, the shares. They then can decide if it will provide the shareholder with the value of the share at par value (predetermined face value for the redemption at the time of the original issue), payable in cash, or by providing the equivalent value in common stock.

As an example, in 2020, Capital One announced an update for its perpetual preferred stock shareholders. They were to expect “a quarterly dividend on the outstanding shares of its 6.00% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B (the ‘Series B Preferred Stock’). Each outstanding share of the Series B Preferred Stock is represented by depositary shares, each representing a 1/40th interest in a share of Series B Preferred Stock. The dividend of $15.00 per share (equivalent to $0.375 per outstanding depositary share) will be paid on March 2, 2020, to stockholders of record at the close of business on February 14, 2020.”

Types of Perpetual Preferred Stock

Perpetual preferred stock can fall into multiple categories:

Growth stocks: This type of perpetual preferred stock has earnings growing at a faster rate than the market average. Because of this, growth stocks rarely pay dividends, so investors buy them in the hope of capital appreciation. You’re likely to come across growth stocks at technology startups.

Income stocks: If you’re looking for consistent dividends, you’ll appreciate that income stocks pay dividends consistently. Investors tend to buy income stocks because they generate consistent income. An established utility company is a good example of a company that will likely have income stocks.

Value stocks: With a low price-to-earnings (PE) ratio, value stocks are cheaper to buy than stocks that have a high PE. Value stocks can be either growth or income stocks, but their low PE ratio can indicate that they are currently less popular with investors. Generally, investors purchase value stocks because they hope the market has overreacted and the value stock’s price will bounce back.

Blue-chip stocks: Typically, blue-chip stocks come from large companies with solid growth histories, and they usually pay dividends.

Alternatives to Perpetual Preferred Stock

If you are interested in receiving consistent dividends, another investing alternative to perpetual preferred stock are preferred securities, which are fixed-income investments that tend to be issued by large insurance companies and banks, and typically pay out dividends.

Preferred securities are perpetual and callable (can be paid off earlier than the maturity date). They have the characteristics of both stocks and bonds, but also have the potential to offer investors higher yields than common stock or corporate bonds.

Pros and Cons of Perpetual Preferred Stock

  • Receive dividend payments before common stockholders

  • Have priority over common stockholders if the company goes bankrupt

  • Preferred stockholders do not typically have voting rights

Pros Explained

  • Receive dividend payments  before common stockholders: Perpetual preferred stock shareholders receive dividend payments before common stockholders.
  • Have priority over common stockholders if the company goes bankrupt: If the company goes bankrupt, perpetual preferred stocks shareholders have priority over common stockholders if the company’s assets are liquidated.

Cons Explained

  • Preferred stockholders do not typically have voting rights: This includes not being able to vote in company elections.

What It Means for Individual Investors

Something important for investors to understand about being a perpetual preferred stock shareholder is that if the company goes bankrupt and its assets are liquidated, you’ll gain access to the proceeds before common stockholders. Holders of preferred stock get paid after the company’s bondholders.

Key Takeaways

  • A perpetual preferred stock has no maturity date and pays a fixed dividend upon issue.
  • Perpetual preferred stock can fall into multiple categories: growth, income, value, and blue-chip stocks.
  • Perpetual preferred stock shareholders will receive any dividend payments before common stockholders.