How Are Preferred Stocks Rated?
Preferred stocks are often rated by independent credit rating agencies, which assess the financial health and creditworthiness of the issuing company. The ratings help investors understand the risk associated with specific preferred stocks. Here’s how the rating process generally works:
1. Credit Rating Agencies
Major agencies such as Moody's, Standard & Poor's, and Fitch provide ratings that range from investment grade (AAA to BBB) to speculative grade (BB to D). These ratings influence investor perception and demand.
2. Factors Considered
- Company's Financial Performance: Earnings, revenue growth, and cash flow are critical indicators.
- Dividend Policy: A consistent dividend history can enhance a stock's rating.
- Economic Conditions: Broader economic trends can impact ratings, especially during downturns.
3. Rating Score Impact
Higher-rated preferred stocks typically offer lower yields because they present lower risk. Conversely, lower-rated stocks may provide higher yields to attract investors willing to take on more risk.
4. Importance of Ratings
Investors should consider ratings as part of their overall investment strategy. Preferred stock ratings can provide insights into potential risks and returns, aiding in more informed investment decisions.