Preferred Stock by ROBERT D. HERSHEY Jr. of the NY Times, February 2000

Preferred shares occupy a clear niche. They are equity shares that rank ahead of common stock in their right to receive dividends and, if the issuer fails, to share in proceeds from its liquidation. With a preferred share of the "cumulative" type, dividend arrears must be paid before holders of common stock get a dime.

The dividends are usually specified when issued -- but sometimes float -- and are usually paid quarterly, unlike bonds, most of which pay interest twice a year. That is a nice advantage. A common issue price is $25, with most issues remaining within a handful of dollars of this or another starting point, like $50, throughout their life. They do not come due on a fixed date, but a time is specified when the company can choose to pay them off.

Preferreds are subordinate to even the least senior bonds, however, generating dividends only after all bondholders get theirs. And holders usually do not get to vote.

Preferred issues trade like bonds, meaning that their prices move more in response to fluctuations in interest rates than in response to what happens to the companies that issue them. (Convertible bonds, on the other hand, trade more like stocks.)

Indeed, preferred shares are best considered as substitutes for bonds, a conservative way to raise portfolio income without going into bonds, which are subject to sharp price swings, the volatility becoming progressively greater as maturity lengthens. Preferred shares are somewhat less sensitive to rates than bonds of the same duration because of their subordination to bonds.

Investing in preferred shares is generally safe and easy, with 468 of them listed on the New York Stock Exchange. But they are not for everyone because, except for those convertible into common stock, they are almost guaranteed not to rise much in value.

"There's no growth in them. Absolutely not."

If interest rates decline, the issuer will redeem the preferred shares at the specified call price plus some premium. Most new preferred issues carry five years of protection against call. In similar circumstances, bondholders would usually get the benefit of rising prices.

What preferreds do offer, in return for investors' sacrificing the chance for capital gains, are potentially high yields.

Traditionally, most preferred shares were bought by corporations, which until 1994 did not pay taxes on 70 percent of dividends from these shares. The reduced corporate presence since the law was changed has tended to raise yields and produced anomalies that smart investors can exploit.

Just a few mutual funds focus on preferreds. But more than a half-dozen closed-end funds do, and all trade at big discounts to their net asset values.

On the other hand, individual preferred-picking can be rewarding. "It's a reasonably inefficient market where an investor with a relatively modest amount of homework can do really well," said Dan Fuss, portfolio manager for the Loomis Sayles Bond fund.

Since the markets for preferred shares tend to be thin, experts say considerable care is needed in checking prices and transaction charges before jumping in.