Definition:

Preferred stock is a type of equity security that provides a fixed dividend payment before any dividends are paid to common stockholders. It typically does not carry voting rights but has a higher claim on assets and earnings than common stock.

Formula:

Dividend Yield = Annual Dividend / Current Market Price

How to use the metric:

Investors use preferred stock to achieve a steady income stream with less risk compared to common stock. The dividend yield formula helps assess the return on investment relative to the stock's market price.

Limitations:

Preferred stockholders generally do not have voting rights, limiting their influence on corporate decisions. Additionally, while preferred dividends are typically fixed, they may be suspended in financial distress. Preferred stock may also have less capital appreciation potential compared to common stock.

Applies to:

Preferred stock is commonly used in industries with stable cash flows, such as utilities, financial services, and real estate investment trusts (REITs), where companies can reliably pay dividends.

Doesn't apply to:

Industries with high volatility and less predictable cash flows, such as technology and biotech, may not be suitable for preferred stock due to the potential for dividend suspension and limited growth prospects.

Summary:

Preferred stock is a hybrid security offering fixed dividends and priority over common stock in asset liquidation. It is suitable for investors seeking income with lower risk but lacks voting rights and significant growth potential. It is best applied in stable industries and less effective in volatile sectors.