This investing strategy can really pay off in time and allow your money to really work for you and not against you. However, not all companies offer this benefit on their preferred stock shares, so be sure to inquire about this before taking a position.
#3. Ability To Convert Shares
In some cases, preferred stock owners have the option to convert their shares into common shares. Given the benefits of preferred stock that I already mentioned, why would you want to convert your shares?
The main reason is if the preferred stock shares are selling at a premium compared to the common shares. For example, you might convert your preferred shares at $60 a piece and get common shares at $40 a piece. You will end up with more shares overall and can take advantage of a greater potential price appreciation than the preferred shares.
In other cases, companies will set a fixed conversion rate when you convert your preferred shares into common shares. In most cases, you end up with more common shares than preferred shares you traded in.
In addition to the above, there are other benefits to converting preferred shares into common shares, including potential higher liquidity.
#4. Higher Claim Than Common Shareholders
When a company goes bankrupt, bondholders are first in line to try to collect they lost investment. All the way at the end of the line are common shareholders. And since there is never anything left for common shareholders to collect, they end up losing their entire investment.
Preferred stock owners though get in line after bondholders. While this does increase the likelihood of collecting, odds are preferred stock holders still won’t collect much. But at the end of the day, the closer you are to the front of the line, the better.
Final Thoughts on why Preferred Stocks Are Smart Investments
All told, there are many benefits to owning preferred stocks. The biggest ones for most investors is a larger dividend, ability to collect unpaid dividends, and the option to convert preferred stock shares to common shares.
Because of this, if these benefits interest you, then it is worth your time to research preferred stocks to see if they are a fit for your portfolio.
This article has been republished with permission from Modest Money.