• Adjustable preferred stock carries unique benefits and drawbacks.new york stock exchange image by Gary from Fotolia.com
  
  Adjustable preferred stock is a type of stock ownership with unique features, including a floating dividend rate and priority payment status. Although these securities are a good buy for many investors, there are distinct pros and cons to adjustable preferred stock ownership that must be considered before investing in these shares.
  
  

Stable Variable Dividend Rate

• According to investopedia.com, adjustable preferred stock ties its dividend payment rate to a relatively stable benchmark, such as the U.S. Treasury Bill (T-Bill). This can offer a distinct advantage over securities with a fixed rate dividend yield, as slight fluctuations in the benchmark can yield a higher rate of return than common fixed-rate offerings. This feature can also be a disadvantage if the benchmark rate of return dips too low.
  
  

Priority of Payments

• An advantage of owning preferred stock rather than common stock is the priority of preferred over common shares for dividend payments. Not only must preferred stock dividends be paid before common, but according to thismatter.com, if preferred shares carry cumulative dividend rights, preferred shareholders must be paid amounts in compensation for any previously unpaid dividends before common shares receive anything at all.
  
  For example, if preferred stock shares carry a $5 dividend, and dividends were not paid out in the previous year, the preferred shareholders would have to be paid $10 per share before common stockholders received payment for the current year.
  
  

No Voting Rights

• A disadvantage of adjustable preferred stock is the exclusion of voting rights, which are reserved solely for common shareholders. This means that while preferred stockholders are almost guaranteed to eventually receive dividend payments, they have no control over the major company decisions, such as the selection of executives and the sale or acquisition of business units, which can be a large determinant of success and continued profitability. This fact makes preferred stock shares more attractive to investors who believe in the strength of an organization and prefer to take a more hands-off approach to company ownership.
  
  

Payments Not Guaranteed

• A disadvantage of stock ownership compared with a bond or annuity purchase is that dividends can be withheld in any year. This means that even though adjustable preferred stock has a relatively stable rate of return and dividends must be paid to preferred shareholders, sometimes cumulatively, before common shareholders, there is still no guarantee that dividends will be received in any given year. This can cause preferred stock ownership to yield unreliable, sometimes sporadic returns.
  
  Research a company thoroughly before investing in preferred stock and choose companies with a proven dividend payout record with good prospects for the future.