Is it Good to Invest in Philippine Preferred Shares – Peso Lab

A preferred share, also called preferred stock, is just like any stock of a company. It represents part-ownership of the business, and people who acquire them have interest in its commercial success. As mentioned in the discussion on what is a stock and how to buy shares from the stock market, way to understand them is to learn how different they are from common stocks.

Preferred shares are acquired by people because of the dividends that they’re expected to receive and the fact that these dividends are paid to them first before owners of common stocks. In the event that the business goes bankrupt, owners of preferred shares are given priority on their entitlement to the company’s remaining assets, and they are paid out first than those who hold common stocks.

These privileges also come with a couple of downsides. For example, shareholders of preferred stocks don’t have any right to vote on important business decisions during annual stockholders’ meeting.

How to buy preferred shares?

You buy preferred stocks the same way that you buy common stocks, through the stock market. However, they’re not traded frequently, and corporations don’t offer them as often as they do common stocks. There are also very few sellers willing to part with their holdings, so the volume of trade is really low if not none at all.

How do you know a preferred shares from the common stocks? The name of the stocks bear the word “Preferred” or “Pref”. When these are offered on IPO, the announcement will also describe

Benefits of acquiring preferred shares

So what do you get in return when you purchase preferred shares? Here are the advantages that shareholders get.

Fixed income

The most obvious benefit is that you’re entitled to a fixed passive income. Companies would issue dividends as a priority to owners of preferred shares. Some corporation offer dividends upwards of 5% per annum and there’s even a few that pay out double-digit rates.

Less volatile

The valuation of the shares are less volatile than the common stocks that are actively traded in the market. Their price remain arguably stable throughout the years, and they’re less likely to change as a response to any shifts in the market.

Diversify

Another reason to purchase these shares is the way it offers investors a means to diversify one’s portfolio. They’re acquired for their opportunity to give steady annual income through the issuance of dividends rather than on the appreciation of their price, which could pose more risks.

Liquidation

In the instance that the company is going to be liquidated, people who have preferred shares have prior claim to its assets than the rest of the shareholders. This is of course after all the liabilities and lenders are paid. The result is that your risks to the ownership of a failing corporation are less than the other shareholders.

Callable

One other advantage that these shares are historically bought back by the companies. This buy back program usually is announced via the Philippine Stock Exchange and leading newspapers. Some of the announcements contain how much the company would pay for each year and whether or not any years with missing dividends would be paid out.

For example, San Miguel Corporation announced that it would be redeeming 6-billion peso worth of preferred shares this year. Ayala Corporation likewise informed the public of its plan to buy back preferred shares by November 2019, with all unpaid dividends of 5.575% annually until the redemption paid.

Disadvantages

Now, just like any other form of passive income investments, there are some downsides.

Tax

Whenever you receive the dividend, the income that you get is going to be dedicated with 10% tax. So even when corporations have issued really good return for your money, your take-home pay is lower because of the tax that you would need to pay.

Liquidity

Once you acquire these shares, it’s not easy to dispose of them. They are very few buyers and sellers for them in the market, so liquidity is an issue. You can’t buy or sell them whenever you want unlike stocks with very high liquidity. So when you decide to get out of this investment and get your money back, you might need to wait for quite some time or wait until the company begins a buyback program.

Recently, only two companies had bared their plans to issue preferred shares. In September 2019, Ayala Corporation said 15-billion-peso worth of preferred shares are going to be issued, while Century Properties Group (CPG) also is going to issue preferred shares with the value of 2 billion pesos.

Opportunity cost

Its advantage of less volatility can be its disadvantage too. There might be stocks where the rise in price may grow more than the income receive from dividends over time.

Updated list of Philippine preferred shares

Are preferred shares right for you?

They are suitable for investors who might want to acquire stocks without being exposed to its volatility, something that cannot be avoided with ownership of common stocks. Preferred shares allow investors to get into the equities market.

Equally important too is the steady income it pays out. When companies couldn’t issue dividend for the year due to some reason or another, then there is a chance that these are paid when these shares are bought back later on.

Finally, they’re great addition to a diversified portfolio. They dampen the effects of exposure to equities.