Preferred Stocks and Bonds

On the surface, preferred stocks and bonds are similar except that preferred stocks do not have maturity dates. However, preferred stocks and bonds have distinct differences. Also, the valuation of preferred stocks vs bonds is different.

How are preferred stocks and bonds the same?

Both preferred stocks and bonds offer relatively attractive yields. Both preferred stocks and bonds can also be called. They can also be converted to common stocks. Some preferred stocks are rates as well as bonds. Both preferred stocks and bonds are issued at par value.

What are the differences between preferred stocks and bonds?

When investing in either preferred stocks or bonds, investors should be aware of their differences.

Dividends

The first main difference between preferred stocks and bonds is that preferred stocks pay dividends which, although often set at a fixed annual rate, the dividends of preferred stocks can be changed by the issuer of the preferred stocks. Sometimes, dividends can be omitted entirely. This is not like bonds and the coupons which, unless the issuer is in default, will be paid fully and on time.

Claims

Preferred stocks have preference over common stocks when it comes to dividend payout and asset distributions. However, a bondholder has legal claims against the assets and interest payments.

Are bonds safer than preferred stocks?

The question of whether bonds are safer than preferred stocks is a loaded one. When investing in bonds, you are more likely to receive interest payments whereas dividends paid on preferred stocks can be omitted. Also, if the issuer is in serious financial trouble and defaulting on payments, then bondholders are more likely to get their money. But, when the issuer is in good financial health, preferred stocks may give the preferred stock holder a bigger pie of the profit.