Preferred Shares vs. Bonds

One of my law school blockmates is now a bigshot over at China Bank so he regularly posts about China Bank's projects, which I'm assuming he was part of, like IPOs, preferred shares offerings and bond offerings.

Just recently, he posted about 8990 Holdings, Inc's preferred shares offering and Retail Treasury Bonds, which gave me instant material for a blog post (Thanks Pope!).

Preferred shares and bonds both guarantee a specific amount to their investors on a regular basis (either quarterly or annually). This income to investors is called dividends for preferred shares and interest for bonds. In this case, 8990 Holdings promises a 5.5% gross dividend per annum, while the Department of Treasury promises a 2.375% net dividends per annum.

Admittedly though, the yields from preferred shares and bonds can appear lackluster when compared to the possible yield from stocks, which is conservatively pegged at 7.5% p.a. But the income from preferred shares and bonds are guaranteed, while income from stocks contains no such guarantee. As always, the safer the investment the lower the return and vice versa. There's no such thing as a low risk, high return investment.

If your portfolio is primarily made up of stocks, then you may want to add dividend and interest bearing instruments into the mix to hedge against the roller-coaster fluctuations of the stock market. If you have sure money coming in from your preferred stocks and bonds, then you'll be less likely to panic and sell your shares when the stock market takes a nose dive (and it will tank).

The primary difference between preferred shares and bonds is that an investor is considered a co-owner in preferred shares and a lender in bonds. So in the event the issuing entity goes bankrupt, bondholders, as lenders, are prioritized when it comes to receiving payment from the liquidated assets of the company. It's not the same with preferred shares though because as co-owners, you're expected to go down with the ship. Preferred share holders do have a higher priority than common share holders when it comes to repayment in the event of bankruptcy, but that's not really comforting.

I'm sure there are more differences between preferred shares and bonds, so feel free to Google away my friends :)

As always, invest with eyes wide open and with your overarching goal in mind.

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