Preferred stock has its fans

Personal Finance

Your Money

April 17, 2007|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

Bill of Brooklyn Park likes to hold preferred stock because of its generous dividends. So the retiree was disappointed when a utility company cashed out his shares.

Now he's having trouble finding other companies that still have preferred stock. He asks: Any ideas where to find them?

If you're unfamiliar with preferred stock, it's a hybrid between a bond and a stock - but more bond than stock. Investors buy preferred stock for the fixed-rate dividends, often yielding 6 percent to 9 percent, rather than for potential appreciation in the stock price.

"From an investor perspective, essentially there really isn't any difference between a preferred stock and a corporate bond," says Josh Peters, editor of the Morningstar DividendInvestor newsletter.

The stock is called "preferred" because its dividends are paid before dividends are paid to common stock investors. If the company goes through bankruptcy, the claims of preferred shareholders come before those of common stock holders.

Some investment professionals dismiss preferred stock as an anachronism, although it enjoyed a resurgence a few years ago after interest rates were slashed to rev up the economy.

There are about 1,250 preferred stocks, down from about 1,600 four years ago, says Don Doan, publisher of QuantumOnline. Doan compiles a list of more than 900 of them at www.quantumonline.com.

Though fewer companies offer preferred stock, those that do sometimes issue a larger number of shares than they used to, Doan says.

Small investors often like preferred stock more than a corporate bond because they don't need as much money to invest, Doan says. An investor might need $1,000 to buy a corporate bond, while a new issue of preferred stock often sells for $25 a share, he says.

As with a bond, the big risk with preferred stock is that the company will default and you'll lose all your money. The higher the dividend, the greater the chance of default.

Companies also have the right to "call" the stock, or cash out investors, usually after five years. That's what happened in Bill's case.

Many times a company cashes out investors when interest rates have fallen and it no longer wants to pay a high dividend on the preferred stock.

Need more time?

The tax deadline is just hours away. Do you need more time?

Even now, it's not too late to fill out Form 4868 to get an automatic six-month extension from Uncle Sam.

"You have six months to get the paperwork in, not an extension of time to pay," says Jim Dupree, an Internal Revenue Service spokesman in Baltimore. Money owed still needs to be sent in by midnight.

This will be a big year for extensions. The IRS expects about 9.9 million people will ask for one, about 355,000 more than a year ago.

Here are several ways to request more time at this late stage:

The IRS in Baltimore is setting up a table today outside its offices at 31 Hopkins Plaza between 8 a.m. and 4 p.m. to accept returns and extension requests. Pay your taxes inside.

You can electronically request an extension through the IRS Free File program at www.irs.gov.

Free File has income limits, but some tax preparers in the program are offering to file an extension regardless of the filer's income, Dupree says.

Also, you can ask for an extension while you're paying taxes with a credit card today, Dupree says. Call 888-272-9829 or 888-729-1040 to pay by plastic. Be aware, you'll be charged a fee of 2.49 percent, which can run into a lot of money if you owe a big tax.

Don't dawdle. You don't want to be caught up in the rush of others trying to get through online and on the phone.

Questions? Comments? Write personal.finance@baltsun.com

MORE AMBROSE Find Eileen Ambrose's column archive at baltimoresun.com/ambrose

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