Par value less than annual dividend for preferred stocks?

Question

Hey I am just skimming through the chapter 18 of the book intelligent investor by benjamin graham with commentary Jason Zweig. Pg:447 It basically compares Real Estate Investment Trust with Realty Equities Corp.of New York. It says that Realty Equities Corp entered to miscellany of ventures, backed by variety of corporate devices including. 1. A preferred stock entitled to $7 annual dividends, but with a par value of only $1, and carried as a liability at $1 per share.

What does this statement even mean? Does that mean that if I buy one preferred stock with preferred stock with $1 par or face value, then I will get $7 annual dividend? It seems ridiculous. And what extra information does liability at $1 per share give other than the preferred stock was issued with par value of $1 per share?

Answer 1

It means that if you buy this preferred stock with a par value of $1 you should get a dividend of $7 per year. However, if the company does not do well, your dividend may not be there.

Just because it has a par value of $1, does not mean that you can buy it for $1. If we are talking about a quality company where the dividend is secure I would expect the price of this preferred stock to be at least $100 maybe $200.

The par value of the stock is not of much interest to the investor. It is used in the companies accounting statements. If I bought a preferred stock with a par value of $1 and the company went bankrupt, I would expect to get at most the par value of the stock. In reality, since preferred stock holders are subordinate to bond holders, if I owned preferred stock in a company that went bankrupt, I would not expect to get anything.