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Why are preferred shares considered to be a fixed-income investment?

Preferred shares usually offer a fixed payment called a dividend. This is the key reason why they are classed as fixed-income securities.

Preferred shares, are actually equities since they represent ownership in a company, albeit limited. Unlike common shares, preferred shares don't participate in the company's growth. They typically have no claim on company earnings, beyond the fixed dividend. Dividends are not a legal requirement like interest payments on bonds. If the company's directors decide to skip the payment of a preferred dividend, there is little the preferred shareholder can do about it. Normally, however, no dividends can be paid to common shareholders until the preferred shareholders have received dividends to which they are entitled. Preferred shares carry greater risk than bonds, since dividends do not have to be paid. If a company goes out of business, creditors and bondholders have the first claim on assets. Assuming sufficient assets remain, preferred shareholders will be limited to receiving a certain dollar amount - generally the original or par value per share - plus any dividends in arrears. Common shareholders are last in line for any assets that might still be left. Another reason why preferred shares are considered to be fixed-income investments is because their value is strongly influenced by changes in interest rates, much like fixed-income securities such as bonds. A fall in interest rates will tend to boost the value of bonds and preferred shares. While preferred shares do not offer the same potential for capital appreciation as common shares, they usually pay a much higher dividend that does not fluctuate. For these reasons, preferred shares are very attractive to conservative, income-oriented investors.

Lighter tax treatment of dividends

Dividend income from preferred and other shares often qualifies for generous tax treatment. While income from employment and interest income from investments are simply taxed at your full tax rate, dividend income from taxable Canadian corporations benefits from preferential treatment that can save you tax dollars.