Preferred Shares

Preferred shares are a type of stock that sits between common shares and bonds. Like common shares, they represent ownership in a company. But like bonds, they pay a fixed dividend and behave more predictably.

If a company runs into financial trouble, preferred shareholders get paid before common shareholders (though after bondholders). That’s where the “preferred” part comes from.

How they work

When you buy preferred shares, you typically receive a fixed dividend payment, often quarterly. The dividend amount is set when the shares are issued and doesn’t change based on company performance. This makes preferred shares appealing to investors who want steady, reliable income.

In Canada, preferred shares are common among big banks and financial institutions. You’ll see them listed with names like “BMO Series 25” or “TD Series 3.”

How they differ from common shares

With common shares, your dividend can be raised, lowered, or cut entirely depending on how the company is doing. You also get voting rights at shareholder meetings. With preferred shares, your dividend is fixed and more predictable, but you typically don’t get a vote.

Preferred shares also don’t tend to rise in value the way common shares can. If a company doubles its earnings, common shareholders benefit. Preferred shareholders still get the same fixed payout.

Who they’re for

Preferred shares are most popular with investors focused on income, especially retirees or those looking for predictable cash flow. They’re not typically where you’d look for growth. Think of them as a middle ground: more income stability than stocks, more return potential than GICs.

A concrete example

Say you buy 200 preferred shares of a Canadian bank at $25 each, with a fixed annual dividend of 5%. That’s $1.25 per share, per year. Your total investment is $5,000, and you’d receive $250 in dividends annually, paid out quarterly at $62.50. If the bank’s common stock doubles, your preferred shares likely stay near $25, but you keep collecting that $250 every year regardless.