Podcast Episode - What You Need To Know About Preferred Stocks


Investing, Stock Market, Stocks


May 28, 2023

Listen to Podcast Episode:

This week’s Suze School is all about preferred stocks and what the difference is between them and common stocks. 


Podcast Transcript:

00:00:28

Suze: May 28th 2023. Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen. All right, before we get into Suze School, there are a few things the most important really being, tomorrow is Memorial Day

00:00:50

Suze: And this obviously is Memorial Day weekend and this weekend is not just about barbecues and an extra day off. This weekend, tomorrow is a true day of remembrance, remembrance of what others did that allowed us to have our freedom. So happy Memorial Day to all.

00:01:18

Suze: Also, I just want to remind everybody that many of you who purchased three month certificates of deposits with Alliant Credit Union, guess what? They are coming due. And I want you to do what I did. And if you do not need that money, I want you to renew it

00:01:45

Suze: for an 18 month period of time at 5.15%.

00:01:54

Suze: I want you to Google, do all the research you can. And I don't think that you will find anywhere,

00:02:02

Suze: any bank or any other credit union, a 18 month where you're locking that interest rate in for 18 months,

00:02:12

Suze: certificate of deposit for 5.15%.

00:02:18

Suze: Now, I am very aware that in the past, I would say no, no go short term, short term because interest rates are gonna continue to go up. All of that changed everybody. When Silicon Valley Bank went under

00:02:35

Suze: and when things change, you have to change, the investment advice has to change. And across the board, when you talk to financial institutions as well as economists, they truly think that interest rates will be coming down. Therefore, you want to lock in

00:02:59

Suze: as long of a rate that seems feasible for you at the greatest interest rate out there. And right now that is the 18 month certificate of deposit at Alliant credit Union. If you don't know about it or you haven't gotten one yet. Simply go to my alliant A L L I A N T my alliant dot com slash ultimate.

 

00:03:28

Suze: And that is where you sign up to get your CDs. Obviously, they have the three month offer, the six month offer, the 12 month offer, it goes all the way out. But I'm going to tell you something next Sunday on that Suze School that day. As to why the certificates of deposit at Alliant Credit Union

00:03:53

Suze: are different than any certificate of deposit out there that at least I know of. So you might want to tune in and take advantage of it. All right.

00:04:07

Suze: Get out your Suze notbooks because today is kind of a Doozy. All right.

00:04:14

Suze: Today's Suze School is about preferred stocks. Now, I mentioned just a little bit ago that I really needed to do a Suze School on preferred stocks. And I got a tremendous response from all of you that said: yes, yes, I really need to do a Suze School on preferred stocks.

00:04:40

Suze: And I had preferred stocks in my head because sometime back in April, I think it was, I got this newsletter called Smart Money Monday and it's written by Thompson Clark

00:04:56

Suze: of Mauldin Economics. Now, remember just a little bit ago, I told you that I went to a conference and it was called the Security Investors Conference SIC. And it was put on by a man by the name of John Mauldin of Mauldin Economics who I just think is so, so brilliant and Thompson Clark is part of Mauldin economics

00:05:24

Suze: and he wrote this newsletter about preferred stocks. And that's when I got that in my head and I briefly mentioned it to you. I think it was a week ago Sunday. So I think what I'm gonna do for this podcast is simply maybe recap

00:05:47

Suze: everything in that newsletter and what I know and put it all together for you so that you can understand there is another way for you to invest, get a great dividend and pretty much have your money safe and sound. So first of all, let's begin, what is a preferred stock? Now,

00:06:12

Suze: most of you that own stocks, own what's called a common stock or you own common shares of a company.

00:06:22

Suze: And the reason maybe that they call it common shares is because it is the most common type of stock that everybody owns.

00:06:35

Suze: But there is a class of stock issued by the company that is above common stock and that is called preferred stock. Now,

00:06:47

Suze: let's talk about the difference between preferred stock and common stock which the majority of you happen to own

00:06:57

Suze: in common stock, you usually are able to vote on things. All right. So whether it's the board of directors or other major decisions, you usually get to have a vote in that. But with Preferred stock,

00:07:14

Suze: it generally does not carry voting rights with it. So in certain cases, it does, but the majority of the time it does not

00:07:25

Suze: in common stock, when you get a dividend, it can be variable and it's dependent on the company's profitability and that's all at the board of directors discretion. Ok.

00:07:41

Suze: But dividends for preferred stocks, you just need to know do not change. They are not variable. So common shareholders like you are generally entitled to dividends, but only listen to me closely. Now, after preferred shareholders have been paid, henceforth, the name preferred.

00:08:09

Suze: So when a stock is paying a dividend

00:08:12

Suze: and let's say their money is tight or whatever. First, those who own preferred stock, they get their dividend and then the common shareholders get their dividend, that can be a big difference. Just so you know, the other main difference between preferred stock and common stock is the dividend.

00:08:40

Suze: So you could own a stock X Y Z company

00:08:45

Suze: and it could be the shares of the common stock and those shares happen to pay you a 3% dividend

00:08:56

Suze: or you could own the preferred shares of X Y Z and the preferred shares dividend would be five and a quarter percent.

00:09:09

Suze: So there is a difference why? Because people normally buy common stock for true growth and possibly a dividend,

00:09:19

Suze: but they normally buy preferred stock for income and more stability.

00:09:28

Suze: So it's things like that, that are the main differences really because I don't want to go that heavily into all the differences between preferred and common stocks. But that's generally how it works. Now listen to me closely, ok,

00:09:46

Suze: preferred stock even though it is preferred and the dividend needs to be paid there above preferred stock. In many cases

00:09:55

Suze: are bonds of the corporation.

00:09:59

Suze: And as you know, bonds are considered debt instruments by the company. So remember a bond is where you lend the company X amount of money. They give you a specific interest rate for a specific period of time and then they try to give you your money back on the date of maturity of that bond. OK. Everybody, a stock

00:10:28

Suze: is an equity investment where you are investing in the company very different than a bond, that is a debt instrument.

00:10:39

Suze: So now you know the difference between bonds, common stock as well as preferred stock.

00:10:47

Suze: Now let me go back to bonds for one second because you're familiar with this when you buy a bond

 

00:10:55

Suze: and let's say a company issues that bond, they issue it at something called Power value, write it down

00:11:06

Suze: and for bonds, the power value is $1000 a bond.

00:11:14

Suze: So if you buy, you know, a bond when it's issued, and let's say you just buy one and you pay $1000 for that bond in between the day that you bought it and the maturity date, it will go up and down in value according to what interest rates are doing,

00:11:35

Suze: interest rates go up, bond prices go down. Did you not all experience that a few months ago or a year ago when as interest rates were going up, what happened to your bond portfolios? They got obliterated everybody. But the opposite is true. When interest rates go down, the value of your bond goes back up. But when a bond matures,

00:12:04

Suze: it usually always matures at par.

00:12:10

Suze: So I just want you to remember that and I'm telling you that because preferred stock also is kind of issued that way. When a company issues preferred stock,

00:12:25

Suze: usually they are issued with a par value and that par value is $25 per share.

00:12:33

Suze: They also will declare a dividend payment that can be paid either monthly or quarterly. Now listen, that dividend is usually fixed or sometimes it can float. So remember in a common stock,

00:12:50

Suze: the dividend can be variable, it can float, it can do whatever it wants. Usually in preferred stock, the dividend is fixed or like I said, in some cases, it can also be variable or floating.

00:13:06

Suze: Now with preferred stock, if you buy preferred stock, you also sometimes not all the time you have the right to convert that preferred stock into common stock at a specific price. Why would you want to do that? The main reason you want would want to do that is you really think that the company that you own preferred stock in

00:13:35

Suze: is going to make you more money if you owned the common stock. Because remember it's the common stock that really goes up a lot faster in value.

00:13:46

Suze: But what I want you to remember is that the main difference between a bond

00:13:53

Suze: and preferred stocks is a preferred stock usually does not have a maturity date, but it is possible that they do a preferred stock like a bond can also have what's called a callable date, write it down.

00:14:15

Suze: So a callable date is when the company has the ability to call that bond back if they want or the preferred stock that they want back. And usually when they do that, they have to pay you par for the stock or the bond that you own. Now, why would a company do that?

00:14:38

Suze: A company would do that if they issued you our preferred stock paying you, uh, five or six or 7% dividend yield or a bond paying you five or 6% in interest. Now, interest rates went all the way down

00:14:57

Suze: and now new bonds really are only paying maybe 0% 1%. Do you remember this? That was true a year or two ago.

00:15:06

Suze: And they want to call in their bonds or preferred stock. Because why should they pay you all that money in interest when they can just give you your money back? They can call in your stock or bond,

00:15:25

Suze: give you your money back and then take that and offer it to new investors at a lot lower interest rates.

00:15:35

Suze: That essentially is how a preferred stock works. Now, not all companies offer preferred shares of their company number one

00:15:49

Suze: And just like all stocks, not all preferred stocks are good.

00:15:57

Suze: So you have to really be careful.

00:16:00

Suze: Now, the key here is to make sure that the company issuing their preferred is solid

00:16:09

Suze: and the preferreds that are most interesting as well as dangerous right now are bank preferred stocks. For you have to remember that just a little bit ago when Silicon Valley went under

00:16:26

Suze: all the preferred stocks that were attached to banks absolutely went down. Now, how do I know that? Because I have a considerable amount of money invested in major banks that I did preferred stocks with because I bought them at like 24 or $25 a share

00:16:53

Suze: and they were giving a really great dividend at a time when you could not get dividends anywhere.

00:17:01

Suze: And I was owning them, especially when interest rates were down quite low. And I was getting a great dividend from them. Then just like everybody else, when interest rates started to go up, the value of those preferred stocks absolutely started to go down in my portfolio. However,

00:17:27

Suze: the dividends stayed solid.

00:17:31

Suze: So I continued to get great income. Now that it's possible that many people think that interest rates most likely will come down.

00:17:44

Suze: Then the movement of a preferred stock should absolutely start to go back up again. So I think it's absolutely possible that while I've been earning 5.5% or more on many of these preferred stocks that I own

00:18:02

Suze: that sooner than later, they will all go back up to par, maybe a little bit above par. Quizzie: what is par in a preferred stock? What does that mean?

00:18:18

Suze: Again when a preferred stock is issued by the company, it is issued at par and par for a preferred stock is $25. So they issue it at $25 with, in most cases, a fixed dividend.

00:18:37

Suze: So, you know, very well, it's going to also behave like bonds, interest rates go up. I'm repeating myself, I know. Interest rates go up, the value will go down, interest rates go down, the value will go up.

00:18:56

Suze: However,

00:18:58

Suze: I've already invested enough money in preferred stocks, but I do think it is something for those of you who are absolutely looking for income. You don't want a lot of fluctuation and you want to know that you really have a preferred situation in case of liquidity of the company and, or the dividends being in jeopardy a little versus the common stock,

00:19:26

Suze: then you would want to possibly take advantage of some of these banks that got hurt and are down. Now, you would want to look for the absolute strongest bank out there if you were to do this and it's just something that you should think about. So I'm gonna do something now

00:19:49

Suze: that is new to the Women and Money podcast. And remember at the beginning of this, I told you how I had been reading this newsletter by Thompson Clark and how great he is in the Mauldin Economics Group and everything like that.

00:20:07

Suze: Well, in that issue that I read back in April, he named his number one Preferred Stock and why he would buy it and what he expects to see happen with it

00:20:25

Suze: because that is his recommendation and not mine because I'm not making any with preferred stocks right now.

00:20:35

Suze: I really think you might want to take a look at it because I think it's a great idea there. But you have to remember this is his recommendation, not mine, but I think he is one seriously smart person. Therefore, today Sunday, I will be posting on the women and money app on the wall.

00:21:04

Suze: The little section that he wrote as to what his number one pick is and why he picked it. And the reason that I'm doing it that way is because then you can read it over and over again. I don't want to say something briefly on the podcast. You listen to it while you're exercising, while you're walking and you don't get it right. You make a mistake and then I'm like, oh really? Are you kidding me?

00:21:33

Suze: So it's going to be there in writing and then what can you do? You can read it over and over and over again.

00:21:42

Suze: If you're not part of the women and money community, you don't have that app. You simply go to Apple Apps, Google Play, search for Women and Money and download it. It is really just that simple. And then you go on the app and look for, you know, events with Suze. It's the wall. It's the very first one in the upper left hand corner

00:22:09

Suze: and there you'll find Thompson Clark's number one recommendation of a preferred stock that he thinks.

00:22:19

Suze: And good reason why he thinks that, that you could easily make 10% a year for the next two years on this stock. Ok.

00:22:30

Suze: That essentially brings us to the end of this Sunday's Suze School. Now I'm gonna try my best to do Suze Schools all the time that Robert is off galvanting around.

00:22:47

Suze: However, I don't know if we're gonna be able to pull that off because he has to carry a little computer with him and do all this stuff. It's not easy. But at least right now we have a Suze School next Sunday. I know we will have another Suze School because I really want you to understand this incredibly different unique feature of the certificates deposit at Alliant Credit Union

00:23:15

Suze: that somehow I just don't think you're aware of. So I'll talk about that and we'll see what happens with the debt ceiling and everything like that. All right.

00:23:27

Suze: But until Thursday when Miss Travis joins us again for another Ask KT and Suze Anything, there's really one thing that I want you to say every single day and it goes like this today, wherever I go, I will create a more peaceful, joyful and loving world. And if you do that,

00:23:55

Suze: I promise you you will be unstoppable. See you Thursday. Bye bye.


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