Preference shares are an even more neglected area in the UK market than Pibs. I regard them as a sort of halfway house between ordinary shares and corporate bonds.
They offer high and reasonably stable income with relative safety, making them a worthwhile home for investors seeking inflation-beating income with little risk of a missed payment or default.
Though they stand behind all corporate debt in insolvency, they rank ahead of ordinary shares. This is true for dividends too, so no ordinary dividend can be paid until preferred holders have been reimbursed.
Nevertheless, unlike payments due on conventional debt, there is no recourse to the company if it isn’t paid. You cannot wind up a company for failure to pay a preferred dividend, which is one of the reasons why preferred shares rank as tier one capital for banks. But dividends on preferred shares are cumulative, so solvent companies usually make up payments eventually.
I already hold Lloyds Bank 9.75% Prefs (LLPD) which I picked up last year when payments resumed.
Today I have purchased Nat West Bank 9% Prefs (NWBD) @ 120.5p and a starting yield of 7.5% payable gross half yearly. Both form a small part of my fixed interest portfolio.
For more detail on NWBD, here’s a link to an article on Monevator from May 2010. Here's a more recent article from last November by Mark Taber's blog on Fixed Income Investments.
On the same day I made an initial purchase of Finsbury Growth & Income Trust @ 455p (see last weeks post) and a starting yield of 2.3%. I would not normally purchase on such a low income however, taking the two transactions together, the combined yield will be just under 5% which is much more acceptable.
As ever, please DYOR - particularly if considering preference shares and/or PIBS. Many small private investors holding Co-op Bank PIBS have had their fingers burnt in recent weeks!