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Investing for income and prepared to take on more risk? Preference shares could be for you…

by , 13 February 2015

If you like investing in bonds for the peace of mind that fixed-interest payments bring, have you considered investing in preference shares?

Preference shares pay out ‘guaranteed' dividends. This type of share does carry higher risks than bonds, so they're not for the risk averse, but they're not as risky as investing in shares.

So what exactly are preference shares? How do they work? And how can you invest in them?

Let's take a closer look

What are preference shares?

Preference shares are a mixture of equity and debt. So they have some of the characteristics of shares and some of the characteristics of bonds.

Preference shares have many of the characteristics of ordinary shares. But you don’t get any voting rights with them. Yet their share price can climb and fall, just like ordinary shares.

They pay a ‘guaranteed’ percentage dividend. This means a company has to pay dividends to its preference shareholders before it can pay anything to its ordinary shareholders from its profits.

It’s this mix of equity and debt characteristics that gives preference a medium-risk characteristic. That’s why preference shareholders can expect to receive a higher level of income than debt holders as they take on more risk.

There are different types of preference shares available to invest in…

Five types of preference shares

#1: Convertible
If the company decides, it can convert this type of preference share into a normal share.

#2: Cumulative
If the company can’t pay the dividends for this preference share in one financial year, if will pay out these unpaid dividends in future years when it’s in a financial position to do so.

#3: Non-cumulative
If the company isn’t in a financial position to pay preference shareholders dividends in a particular financial year, the holder forfeits the right to this dividend.

#4: Participating
In addition to the dividends preference shareholders receive, they’ll also receive ordinary share dividends.

#5: Redeemable
The company can redeem or buy back these preference shares at some point in the future if it wants.

How to invest in preference shares

If you want to invest in preference shares, it’s exactly the same process as buying ordinary shares. You need to have an account with a stock broker.

On your instruction, a stock broker will buy preference shares for you. Currently there are just over 30 different preference shares listed on the Johannesburg Stock Exchange.

So there you have it. Why preference shares could be for you if you’re investing for income and are prepared to take on more risk.

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Investing for income and prepared to take on more risk? Preference shares could be for you…
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