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The benefits of investing in preference shares

by , 10 November 2014

When it comes to investing, you may think that you have to decide between investing in shares and investing in bonds.

But what if there was an investment that combined shares and bonds to give you the benefits of both?

That's where preference shares come in.

So what are preference shares? And what are the benefits of investing in them?

Let's take a closer look…

What are preference shares?

Preference shares give you the safety that comes with buying bonds and a regular income. And preference shares have the upside of stocks.

If you’re looking for an income, preference shares can give you a bumper dividend yield. At the moment on the Johannesburg Stock Exchange, there are preference shares with dividend yields in excess of 10%.

What makes preference shares different from shares?

With preference shares, a company still considers the preference shareholder a part-owner, just like with ordinary shares. The price of preference shares also rises and falls like ordinary shares, though the upside is limited.

Even though there’s an element of debt with preference shares, they’re still equity, like shares. A company may opt to issue preference shares to keep its debt levels down, Dr David Eifrig in Daily Wealth explains. This is because they’re more flexible than bonds.

Ordinary shares are pure equity.

When you invest in ordinary shares, you could potentially own them for life as long as the company didn’t delist. Preference shares, on the other hand, tend to have a limited lifespan of about five years.

Why invest in preference shares?

The benefit to you of investing in preference shares is that the dividends are much more reliable. This dividend isn’t just as certain as the interest payments on bonds. But a preference shareholder has a much higher chance of receiving a dividend than an ordinary shareholder.

This is because companies must pay out dividends to preference shareholders before they pay dividends to ordinary shareholders. And this is one of the major advantages of investing in preference shares.

Not only that, if you opt for cumulative preference shares, if a company defers any dividends, once it has the money to do so, it must pay missed dividends to you before resuming payments to its ordinary shareholders.

And if you invest in preference shares in top companies, there’s a lower risk of this happening.

So there you have it. The benefits of investing in preference shares.

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The benefits of investing in preference shares
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