What Is Convertible Preferred Stock?

Convertible preferred stock is a hybrid investment security. It combines the fixed-income properties of preferred stock with the option to convert the shares into common stock equity. Convertible preferred shares offer investors the potential to earn a higher total return than other fixed-income securities, with less risk than a common stock investment. Learn about convertible preferred stock, how it works, why an investor would choose convertible preferred stock, and an example.

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paper stock certificates — Image source: Getty Images.

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Dividend Payments

The distribution of a company's profits to its shareholders. Dividends are usually paid in cash but sometimes in company stock, as well.

In addition, convertible preferred investors can still participate in the company's upside potential through the conversion option. If the common share price rises above the conversion price, the investor can exercise their conversion option and become an investor in its common equity, enabling the investor to participate in its long-term upside. Meanwhile, the investor can continue earning the preferred return if shares never reach the conversion price.

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About the Author

Matt DiLallo has been a contributing Motley Fool stock market analyst specializing in covering dividend-paying companies, particularly in the energy and REIT sectors, since 2012. He also covers pre-IPO companies, ETFs, and other investing topics. He holds an MBA from Liberty University.

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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.