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  9. Preferred shares vs. dividend paying common shares?

Topic: Preferred shares vs. dividend paying common shares?

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A Canadian MoneySaver Reader
Thu Jan 15, 2015 1:11 pm

Doug Stone
Sat Jan 17, 2015 10:13 pm

Just working my way through Security Analysis (Sixth Edition). Graham/Dodd have this to say:
Opening paragraph of Chapter 14:
"THAT THE TYPICAL preferred stock represents an unattractive form of
investment contract is hardly open to question. On the one hand, its principal
value and income return are both limited; on the other hand, the
owner has no fixed, enforceable claim to payment of either principal or
income. It may be said that preferred stocks combine the limitations of
creditorship (bonds) with the hazards of partnership (common stocks)."

Concluding paragraphs of Chapter 14:
"One feature of the study, however, deserves particular comment. The detailed
figures show in striking fashion that the stability of nearly every preferred
stock considered was directly dependent upon an increase in the value of
the common stock. The preferred stockholder had a satisfactory investment
only while the common stock was proving a profitable speculation.
As soon as any common stock declined in market value below the original
price, the preferred shares did likewise.

"An investment subject to such conditions is clearly unwise. It is a case
of: “Heads, the common stockholder wins; tails, the preferred stockholder
loses.” One of the basic principles of investment is that the safety of a security
with limited return must never rest primarily upon the future expansion
of profits. If the investor is positive that this expansion will take place,
he should obviously buy the common stock and participate in its profits.
If, as must usually be the case, he cannot be so certain of future prosperity,
then he should not expose his capital to a risk of loss (by buying the
preferred stock) without compensating opportunities for enhancement."

Fri Nov 25, 2016 5:22 pm

True if buying preferred at par value. However when a company runs into problems, the preferred dividends can be a great return. Off course there is always the risk company will not be able to pay its bills. Some of the Bombardier preferreds still have very juicy returns though not as great as earlier in 2016.

Daniel Gardner
Fri Jan 20, 2017 9:08 am

I am also finding many companies are starting not to redeem after the 5 year period- which is a problem

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