Preference shares: One way to boost your income

Preference shares are a special type of share that some companies issue. On the JSE at the moment, nearly 30 companies have preference shares listed. If you're looking for income over the long-term, look to preference shares. So what is a preference share? And why invest in preference shares? Read on to uncover what you need to know…

What are preference shares?

Preference shares are different from ordinary shares that you usually buy on the stock market. A preference share comes with a few added bonuses over ordinary shares, Phil Oakley in Money Week explains.

If you own preference shares, you’ll receive your dividend payments before ordinary shareholders. And if the worst happens and the company goes bust, you’ll get your share of any money before ordinary shareholders do.

Usually a preference share pays a dividend at a fixed rate. This means that even if the company’s profits rise, a preference share’s dividend payment won’t.

And it’s because of this guaranteed pay-out that means preference shares are less risky than ordinary shares. A company can’t even think about paying dividends to ordinary shareholders until preference holders have had their cut.

If a company can’t pay its dividend and you hold a cumulative preference share, you’d get any missed dividends when the company could afford to.

Investing in preference shares

Speak to your stockbroker if you’re interested in buying preference shares. There aren’t that many in circulation. They tend to pay good dividend yields. Anything up to about 11% at the moment.

Check the spread between the buying and selling price with your broker before making any decisions. You want to ensure that it’s worthwhile to invest.

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It’s not always the best decision to buy preference shares of companies with lots of debt. So also check this out before committing.

And if you’re investing in preference shares for the long-term, don’t opt for redeemable preference shares. A company has the right to buy this type of share back when it chooses.

So there you have it, preference shares, one way to boost your income.

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