preferred stock

A class of stock that pays dividends at a set rate. Holders of preferred stock receive their dividends before common-stock holders if the company reduces or eliminates its common dividend payment. In the case of a bankruptcy or liquidation, preferred-stock holders receive the proceeds before common-stock holders. Preferred stocks do have some draw-backs. If the company’s earnings rise, the preferred stockholders’ dividend payment remains fixed at the initial dividend level. Typically preferred stockholders don’t have voting rights.

Dividends can be cumulative, which means that if they are not paid in a particular year then they will be carried forward. However, these are not debts of the com-pany because the directors can defer preferred dividends indefinitely. Non-cumulative dividends are lost if they are not paid in a particular year. Preferred stock dividends can have tax advantages for corporate investors, which is one reason they are the primary purchasers of preferred stock.