- When evaluating a preferred stock, it is important to check the EBITDA coverage ratio. EBITDA stands for earnings before interest, taxes, depreciation and amortization. The coverage ratio lets you know if the company is able to meet its debt obligations or not. The higher the coverage ratio, the more likely the company is able to pay its debt. Sites such as New Constructs and Zecco allow you to screen preferred shares for EBITDA and make side-by-side comparisons.
- Ratings agencies, such as Standard and Poor's and Moody's, offer debt ratings on preferred stocks. Preferred stocks are rated much like bonds. Generally speaking, ratings below a B are considered junk, meaning the company may have trouble meeting its debt obligations. If you wish to avoid taking risk, it is a good idea to look at companies that have a rating of A or higher--AAA is the highest rating possible.
- Preferred stock yield is measured by dividing the company's annual dividend payment by its market capitalization, or cap. Market cap is the value of all outstanding shares. You can compare the yield for the preferred stock against the yield for the same company's common stock. Ideally, you will want to see the preferred's yield higher than the common stock's yield. If the yield is lower, it could mean that the market price of the preferred stock is overvalued.
- Some companies provide a promise to their preferred stock owners. If a preferred stock is considered cumulative, it means that if they are unable to make a dividend payment one quarter, they promise to make it up in the following quarters. Consequently, companies with noncumulative preferred shares don't have to make up missed dividend payments. This can be especially important to investors who depend on dividend payments as a source of income.
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