As my investment club ventured into the preferred stock arena, I have to admit we weren't giving credence to the primary unknown involved - the probability of redemption. Inexperienced investors in preferred shares are welcome to learn from our missteps.
My club is focused on hedging against the next correction by building our income stream and protecting value. So, we haven't weighted a "redemption probability" factor into our decision-making. But, even in our limited exposure and experience, we're finding that may have been shortsighted.
Urstadt Biddle Properties is on our radar. It's the type of investment we relish - a REIT with a deep moat and safe and steady income. But, with Urstadt Biddle, the reality of a prompt redemption stares us in the face. And now, we understand, it's ill-advised to ignore that factor.
A Basic Preferred Stock Primer
Unlike common stock, investors in preferred shares are assured a minimal value (the call price) at a specific future date (the call date). Because of the call price or assured value, preferred shares typically trade in a fairly tight range. Thus, the majority of the return earned on preferred shares is generated from the dividend.
Regarding the dividend, the yield on preferred shares is usually greater than the yield on common stock. Dividend distribution on preferred shares is given precedence over common shares. However, the dividend rate on preferred shares is typically fixed through the call date and does not have the potential to grow like the dividend rate for a common share.
The factors for specific preferred shares, such as the call price, call date, dividend rate, etc. are defined in the issuing company's prospectus. Factors can and do vary. For example, the dividend rate may shift from a fixed rate to a floating rate after the call date. Or, the dividend can be cumulative or non-cumulative, which defines whether
