Filipino investors seeking potentially more stable returns and lower volatility are increasingly turning to preferred stocks instead of common stocks. Several factors are fueling this trend, including the perceived safety, dividend priority, and unique features that preferred stocks offer, which common stocks don’t typically provide. This article will investigate why preferred stocks are gaining popularity among Filipino investors and if they’re the right investment choice for you.
Understanding the Basics: Common Stocks vs. Preferred Stocks
Okay, let’s start with the basics. Think of common stocks as owning a tiny piece of a company. As a common stockholder, you get voting rights, which means you can (theoretically, at least) have a say in how the company is run. You also benefit from the company’s success – if the company does well, the stock price goes up, and you can sell it for a profit. But here’s the catch: if the company goes belly up, you’re last in line to get your money back during bankruptcy proceedings.
Preferred stocks, on the other hand, are kind of a hybrid. They’re like a cross between stocks and bonds. You don’t usually get voting rights, but you DO get priority when it comes to dividends. This means that preferred stockholders get paid their dividends before common stockholders. Also, in case of bankruptcy, preferred stockholders are higher up the pecking order than common stockholders (but still below bondholders).
The Appeal of Preferred Stocks for Filipino Investors
So, why are some Filipino investors gravitating towards preferred stocks? Let’s dive into the reasons:
1. Dividend Priority: A Steady Income Stream
This is probably the biggest draw. In the Philippines, many investors, especially retirees and those approaching retirement, are searching for reliable income streams. Preferred stocks often offer a fixed dividend, meaning you know exactly how much income you’ll receive for each share you own. This predictability is hugely appealing in a volatile market. Moreover, companies are generally more motivated to pay preferred stock dividends since skipping them can have severe consequences on its credibility and future financing.
Consider this example: A local power company issues both common and preferred stocks. The preferred stocks promise a fixed annual dividend of 6%. Even if the market is shaky and the company’s common stock price fluctuates, the preferred stockholders are still entitled to their 6% dividend. This is a significant advantage over common stock dividends, which can be reduced or even suspended depending on the company’s financial performance.
2. Lower Volatility: A Smoother Ride
Preferred stocks tend to be less volatile than common stocks. This is because their price is less directly tied to the company’s growth prospects and more to interest rate movements and the company’s creditworthiness. For Filipino investors who are risk-averse or nearing retirement, this lower volatility can provide peace of mind. High volatility can be stressful, and the price of common stocks can drop significantly. Unlike common stock investors, prefered stockholders can sleep better at night.
3. Seniority in Bankruptcy: A Safety Net
While no one wants a company to fail, it’s important to consider the worst-case scenario. In the event of bankruptcy, preferred stockholders have a higher claim on assets than common stockholders. While they’re still behind bondholders and other creditors, they’re ahead of common stockholders in line to receive any remaining assets. This provides a layer of protection, particularly in uncertain economic times.
4. Tax Advantages (Potentially): Know the Rules
The tax implications of preferred stocks can be a factor, however, it’s best to consult with tax professionals. In the Philippines, dividend income from stocks is generally subject to a final tax. However, certain types of preferred stocks or specific investment vehicles might offer tax advantages, depending on the investor’s circumstances. Before making any investment decisions, it is best to check with a tax professional in the Philippines about the latest tax laws and how they apply to your investment.
5. Specific Features: Callable and Convertible Preferred Stocks
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Preferred stocks can come with various features that can be attractive (or unattractive, depending on your goals). Two common features are:
Callable Preferred Stocks: These give the issuing company the right to redeem the shares at a predetermined price after a certain date. This can be good for the company if interest rates fall, but it can be a disadvantage for the investor if they were relying on the dividend income. Callable preferred stocks have to be carefully evaluated.
Convertible Preferred Stocks: These give the investor the option to convert their preferred shares into a predetermined number of common shares. This can provide upside potential if the company’s common stock price rises significantly. Convertible preferred stocks allow stockholders to convert to common stocks at an agreed price.
Is it for You: Things to Consider Before Investing in Preferred Stocks in the Philippines
Before you jump on the preferred stock bandwagon, let’s consider some important factors:
1. Interest Rate Risk: Understand the Connection
Preferred stock prices are sensitive to interest rate changes. When interest rates rise, the value of existing preferred stocks tends to fall because new preferred stocks will be issued with a higher yield. This inverse relationship can impact your portfolio’s value, especially if you plan to sell your preferred stocks before maturity. It’s crucial to understand prevailing interest rate environment and its potential impact.
2. Credit Risk: Assess the Company’s Financial Health
While preferred stocks are generally safer than common stocks, they’re still subject to credit risk. This means there’s a risk that the issuing company could default on its dividend payments or even go bankrupt. Therefore, it’s essential to carefully assess the financial health of the company before investing in its preferred stocks. Look at their debt levels, profitability, and cash flow.
3. Liquidity: Check How Easy It Is to Buy and Sell
Not all preferred stocks are created equal when it comes to liquidity. Some preferred stocks are thinly traded, which means it can be difficult to buy or sell them quickly without affecting the price. This can be a concern if you need to access your investment quickly. You need to check volume traded daily.
4. Opportunity Cost: Don’t Miss Out on Potential Gains
While preferred stocks offer a steady income stream and lower volatility, they typically don’t offer the same potential for capital appreciation as common stocks. If you’re looking for high growth, common stocks might be a better option. Consider your overall investment goals and risk tolerance. The potential of capital appreciation is usually not associated with preferred stocks.
5. Call Risk: The Company Might Take Back Your Shares
As mentioned earlier, callable preferred stocks can be redeemed by the issuing company. If this happens, you’ll receive the call price (usually the par value of the stock), but you’ll lose the future dividend income. This can be a disadvantage for investors who rely on the dividend income.
Where to Find Preferred Stocks in the Philippines
If you’re interested in exploring preferred stock investments in the Philippines, here are some places to start:
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The Philippine Stock Exchange (PSE): The PSE lists preferred stocks issued by various local companies. Check their website (though you must register to see this information) to view a list of available preferred stocks and to research company information.
Local Brokerage Firms: Many brokerage firms in the Philippines offer access to preferred stocks. They can provide you with research reports, market insights, and assistance with your investment decisions.
For instance, you can visit the website of one of the leading brokerage firms in the Philippines, (https://www.firstmetrosec.com.ph/) to learn more about their services and available investment options.
Banks: Some banks in the Philippines also offer investment products that include preferred stocks.
Financial Advisors: A qualified financial advisor can help you assess your investment goals, risk tolerance, and financial situation and recommend suitable preferred stock investments.
Tips for Investing in Preferred Stocks in the Philippines
Here are some practical tips for investing in preferred stocks:
Do Your Research: Before investing in any preferred stock, conduct thorough research on the issuing company. Understand its business model, financial performance, and credit rating.
Diversify: Don’t put all your eggs in one basket. Diversify your preferred stock portfolio across different companies and sectors to reduce risk.
Consider Your Investment Goals: Determine your investment goals and risk tolerance before investing in preferred stocks. Are you looking for a steady income stream, capital preservation, or a combination of both?
Read the Prospectus Carefully: The prospectus is a document that provides detailed information about the preferred stock offering. Read it carefully to understand the terms and conditions, including dividend rate, call provisions, and conversion options.
Consult a Financial Advisor: If you’re unsure about whether preferred stocks are right for you, consult a qualified financial advisor for personalized advice.
Case Study: A Filipino Investor’s Perspective
Let’s look at a hypothetical example. Maria, a 60-year-old retiree in the Philippines, is looking for a safe and reliable income stream to supplement her pension. She invested in common stocks before, but was stressed with its volatiliy. After researching, she decides to allocate a portion of her savings to preferred stocks issued by a reputable telecommunications company. The preferred stocks offer a fixed dividend of 7% per year. Maria is happy with the stable income and the lower volatility compared to her previous investment in common stocks. This fixed income can help her achieve her financial goals.
However, Maria regularly monitored the telecommunications company’s financial statements to ensure it remained financially sound. Because she understood some of the risk of investing in preferred stocks, she was able to avoid investing in another preferred stock which she later learned was having financial difficulties.
FAQ: Preferred Stocks in the Philippines
Q: What is the minimum investment required to buy preferred stocks in the Philippines?
The minimum investment required depends on the brokerage firm and the specific preferred stock offering. Some brokerage firms may require a minimum account opening balance, while others may allow you to purchase as few as one share of preferred stock. Check with your chosen brokerage firm for their specific requirements.
Q: Are preferred stock dividends guaranteed?
While preferred stock dividends are generally considered more reliable than common stock dividends, they are not guaranteed. The company can suspend or reduce dividend payments if it experiences financial difficulties.
Q: How are preferred stocks taxed in the Philippines?
Dividend income from preferred stocks is generally subject to a final tax. However, the specific tax rate and any applicable exemptions may vary. Consult with a tax professional for personalized advice.
Q: What are the risks of investing in preferred stocks?
The risks of investing in preferred stocks include interest rate risk, credit risk, liquidity risk, call risk, and opportunity cost.
Q: Are preferred stocks a good investment for everyone?
Preferred stocks are not suitable for all investors. They are generally best suited for investors who are looking for a steady income stream, lower volatility, and capital preservation.
References
Philippine Stock Exchange (PSE) website
Securities and Exchange Commission (SEC) Philippines website
Various Philippine brokerage firm websites
Philippine Daily Inquirer Business Section
Business World Philippines
Instead of providing a conclusion, remember that choosing between common and preferred stocks depends heavily on your personal financial circumstances, risk tolerance, and investment goals. There are risks with all investments, and it is best to fully understand what you are investing in. It’s highly recommended that you do your research and seek personalized financial advice from a qualified financial advisor in the Philippines before making any investment decisions. Don’t just blindly follow trends. Understand the risks and potential rewards before committing hard-earned money. Always remember that the best investment is the one that aligns with your individual needs and long-term financial plan.
