Do not take your dividend payouts for granted. In the case of OCBC Bank preference shares, do note that the dividend payment is not cumulative. If OCBC, for whatever reason, stops payment for one year, the amount not paid that year is not payable in the following year.
2 Issuer not obliged to redeem shares
You may be perpetually stuck with your preference shares but you are free to sell them in the open market. This is because the issuer has the right, but no obligation, to redeem the preference shares, and shareholders might have no right to call for their redemption.
In the case of OCBC's latest issue, the bank might redeem the shares five years after the issue date, and on each dividend payment date thereafter, although it is not obliged to do so. In the event that it does, it will pay the investor the issue price of $100 for each preference share.
3 Not actively traded, so not easy to sell
The open market for preference shares might not be sufficiently liquid. They are not actively traded because investors who buy such shares hold them as long-term investments. This makes selling your shares difficult or painfully slow.
This is why industry experts say that such shares are more suitable for people with loads of surplus funds.
In the case of OCBC, it said that it designed the offering scheme of its latest issue in such a way as to improve liquidity.
'We have lowered the minimum subscription amount to try to create a broader investor market for the preference shares. We believe the expected large number of subscribers and the small board trading lots of $10,000 will enhance the liquidity,' said Mr George Lee, the head of group investment banking at OCBC Bank.
In any case, he added, low liquidity does not mean there is no demand. Instead, it could mean investors might need a longer time to sell their shares.
OCBC preference shares will be listed on the mainboard of the Singapore Exchange, which will also help to improve their liquidity, said Mr Lee.
4 Shares may be worth less than initial price
The preference shares might trade below their initial issue price. Factors that affect the share price include prevailing market conditions, such as interest rates, as well as the issuer's credit standing.
Already, OCBC's rarely traded 3.93 per cent preference share has fallen below its issue price of $100 to $98.
Generally, preference shares are in danger of falling below their issue prices given the current trend of rising long-term interest rates.
This capital risk is not well-appreciated by retail investors.
5 Shareholders among last to be paid if issuer folds
Holders of preference shares are among the last to get paid if the issuer goes belly up.
Preference shares rank above ordinary shares, but below bank deposits, interbank borrowings and other creditors, including holders of subordinated debt, in terms of payment priority.
That is why preference shares pay dividend rates that are much higher than the rates on fixed deposits, which are relatively risk-free.
This article was first published in The Sunday Times on Jun 8, 2008
