Preferred shares provide a special investment opportunity for Filipinos looking to support local companies while enjoying certain privileges that come with the shares. These shares combine features of both stocks and bonds and give investors a unique stake in a company’s success, particularly regarding dividends and asset distribution.
What are Preferred Shares?
Preferred shares are a hybrid type of investment, merging elements of stocks and bonds. When you buy preferred shares, you are essentially purchasing a part of the company, akin to buying a stock. However, these shares also resemble bonds because they usually pay a fixed dividend, similar to interest payments you receive from bonds. It’s important to note that dividends aren’t guaranteed; they must be declared by the company’s board.
When you invest in preferred shares, you gain specific advantages over common stockholders. The most notable benefits involve priority for dividend payments and asset distribution. This means you have a better chance of receiving payments even if a company faces financial challenges.
Key Features of Preferred Shares for Filipino Investors
Preferred shares offer distinctive features that set them apart from other investment forms, making them a potentially suitable option for various Filipino investors:
Fixed Dividends: Many preferred shares come with a fixed dividend rate, allowing you to know exactly how much income you can expect regularly. This predictable income can be very appealing for those seeking an income source, especially in a low-interest-rate environment. However, it’s still crucial to remember that dividends are not guaranteed and can be subject to the company’s financial health.
Dividend Priority: Preferred shareholders receive dividend payments before common shareholders, meaning if a company does generate profits, you will get paid before those who hold common stocks. This prioritization can make preferred shares a safer choice during tough financial periods.
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Seniority in Liquidation: If a company goes into liquidation, preferred shareholders have a higher claim to the company’s assets compared to common shareholders. This means that in the unfortunate event of bankruptcy, you will likely recover your investment before common stockholders receive anything.
Cumulative vs. Non-Cumulative: There are two types of preferred shares: cumulative and non-cumulative. Cumulative preferred shares ensure that if a dividend payment is missed, the company must pay all overdue dividends before paying any common shareholder dividends. On the other hand, non-cumulative preferred shares mean that if a dividend is missed, you won’t receive any compensation for that amount. Understanding this part can significantly affect your investment’s risk and potential return.
Callable or Redeemable: Numerous preferred shares are callable, allowing the issuing company to buy them back at a set price on a specific date. While this provides flexibility for the company, it can also pose a reinvestment risk for you if interest rates have fallen since you purchased the shares. Details such as the call date and price will be explained when the shares are issued.
Convertible: Certain preferred shares can convert into a predetermined number of common shares. This feature can be beneficial if the company’s common stock price rises above a specified conversion price, combining the stable income of preferred shares with the potential growth of common stock value.
Benefits of Investing in Preferred Shares in the Philippines
For Filipinos looking to diversify their investment choices, preferred shares come with numerous advantages:
Potential for Regular Income: The fixed dividend payments offered by preferred shares can provide a stable income stream, which is particularly valuable for retirees or anyone seeking predictable cash flow. It’s important to keep in mind that while dividends tend to be reliable, they are not a sure thing.
Lower Volatility Compared to Common Stocks: The price of preferred shares generally fluctuates less than that of common stocks. This could be an attractive quality for investors who prefer to avoid high volatility, leading to a more stable investment experience.
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Diversification: Incorporating preferred shares into your investment portfolio can help lower overall risk exposure. They present a different risk-return profile compared to standard stocks and bonds, which can stabilize your investment strategy during market fluctuations.
Potential for Higher Yields than Bonds: In certain market circumstances, preferred shares might yield better returns compared to similar bonds. This makes them an appealing alternative for those seeking income.
Risks Associated with Preferred Shares
While preferred shares have various advantages, it’s also necessary to understand the potential risks involved:
Dividend Risk: Even though dividends are often fixed, they are not always guaranteed. If a company faces financial struggles, the board of directors has the authority to suspend or reduce dividend payments. It’s crucial to keep this risk in mind when investing.
Interest Rate Risk: Preferred shares can be sensitive to changes in interest rates. When rates increase, the value of preferred shares may decline since their fixed dividend yield could become less attractive compared to newly issued securities with better yields. Staying informed about economic conditions can help you gauge this risk.
Call Risk: If the preferred shares you hold are callable, the issuing company can redeem them, which often occurs when interest rates fall. This could lead you to reinvest your funds at lower rates than what you initially received, which can be disappointing.
Credit Risk: The value of preferred shares is directly tied to the financial condition of the issuing company. If the company’s credit rating worsens or it faces bankruptcy, the market price of your preferred shares can significantly drop.
Liquidity Risk: Depending on the specific preferred shares and prevailing market conditions, it may be hard to buy or sell them quickly without impacting the price. This could result in challenges when trying to exit your investment.
How to Invest in Preferred Shares in the Philippines
For Filipino investors looking to purchase preferred shares, there are several ways to go about it:
Stock Brokers: Most stock brokers operating in the Philippines provide access to preferred shares available on the Philippine Stock Exchange (PSE). To get started, you’ll need to create a brokerage account and follow the steps to make your purchase.
Initial Public Offerings (IPOs): Sometimes companies issue new preferred shares through IPOs. You can subscribe to these offerings via participating brokers, so it’s essential to stay updated on IPO announcements by following reputable financial news outlets.
Mutual Funds and Unit Investment Trust Funds (UITFs): Some mutual funds and UITFs focus on fixed-income securities, including preferred shares. Investing in these funds can offer diversification and professional management of your investment.
Factors to Consider Before Investing
Before jumping into preferred shares, it’s wise to assess these factors carefully:
Your Investment Goals: What do you want to achieve with your investment? Consider whether you’re primarily looking for income, accelerating capital growth, or diversifying your portfolio.
Your Risk Tolerance: How comfortable are you with the possibility of loss? Understanding that preferred shares have specific risks associated is essential before making any moves.
The Company’s Financial Health: Research the issuing company’s financial statements and credit ratings thoroughly. Ensure the company is in good financial shape and can sustain dividend payments. Key documents to review include the company’s balance sheet, income statement, and cash flow statement.
The Specific Terms of the Preferred Shares: Familiarize yourself with important features like the rate of dividends, whether they are cumulative or non-cumulative, and any specific call provisions. This information is often included in the prospectus provided when the shares are issued.
Market Conditions: Consider the current interest rate climate and overall economic outlook, as these factors can play a significant role in the value of preferred shares.
FAQ
What is the tax treatment of dividends from preferred shares in the Philippines?
Dividend income from preferred shares is generally subject to withholding tax, aligned with existing tax regulations in the Philippines. For tailored advice, consider consulting a tax professional.
Can I lose money investing in preferred shares?
Yes, you can potentially lose money. Many factors can cause the value of preferred shares to decline, including shifts in interest rates, the company’s financial health, and broader market conditions. There is a chance that your initial investment could be at risk.
How do preferred shares compare to common stocks in terms of voting rights?
Typically, preferred shares do not come with the same voting rights as common stocks. Common stockholders often have the right to vote on essential company issues, whereas preferred stockholders may have limited or no voting rights, except under certain conditions specified in the share agreement.
Where can I find information about preferred shares offered in the Philippines?
You can find information about preferred shares through stock brokers, financial news websites, the Philippine Stock Exchange (PSE) website, and company prospectuses. Be sure to review all available data before making an investment decision.
What is the typical minimum investment required to purchase preferred shares?
The minimum investment amounts can vary depending on your broker and the specific preferred shares in question. It’s a good idea to confirm the minimum investment requirement with your broker.
References
Investopedia. “Preferred Stock.”
Securities and Exchange Commission (Philippines). “Investor Education.”
Philippine Stock Exchange (PSE). “Listed Companies.”
