With the change in ownership last week of one of Bermuda?s publicly traded companies, thousands of former shareholders are now faced (some for the first time) with making intelligent informed choices about where, what, how and when to reinvest their share proceeds. Many shareholders relied upon the dividend income stream to augment their lifestyle, while others chose a capital appreciation route ? automatically reinvesting cash dividends into more shares. What then should investors be investing in. It depends on your lifestyle goals, your income needs, your longevity and your personal risk profile among other criteria.Almost everyone knows the structure of fixed and term deposit savings accounts, but dividends from common and preferred stock are entirely different investment vehicles. In the ordinary course of investing here in Bermuda, domestic company shares are well known, almost like old friends. They have been here forever, it seems with consistent reliable dividends paid every quarter, year in, year out. No surprises. Thus, owning equity or debt of a local corporation did not really seem to be investing. However, when faced with prospect of investing outside the realm of Bermuda, the process seems uncomfortable, well, almost foreign. And yet, the concept and the process is the same. Perhaps the hurdle that is the most difficult for investors to overcome is the accelerated learning required to feel comfortable with the whole investing process. Generally, public companies don?t own the majority of their shares traded in the secondary market.Investors often think when shares are bought and sold that the company benefits directly. Let?s start with some basic premises using Ford Motor Company (trading symbol F: NYSE) Why this company as an example? Read on. Hard to believe but Ford Motors was once very, very small. The owners issued shares of stock to the public in an offering sale; now each and every investor purchasing that original IPO stock (years ago) has the right to sell it to any willing buyer ? on the secondary market. The issuing company no longer owns most of that original offering, nor does it receive any additional proceeds when the stock is sold again and again What are some of the ways a company raises cash for expansion and capital projects? It can cut back or eliminate dividends, float a secondary stock offering, or borrow money from banks or the public (bonds).Owning equity positions in a company gives you certain rights, one of which is to receive a dividend if declared, and another to be able to vote on corporate actions. A shareholder may not want to allow a company to issue more stock for financing purposes because it will dilute their position. Issuing bonds accomplishes the same goal, raising cash but with different ramifications since interest paid out may affect the bottom line. Bondholders become company creditors with a long-term focus toward realising interest on and the eventual return of their bond debt principal at maturity of their bonds. A shareholder may be concerned about the company?s annual earnings because that may dictate the amount of dividend paid. The creditworthiness of a company long-term is even more important to a bondholder because excellent credit ratings are reassurance that the company is on a solid financial track. Public corporations are not obligated to pay dividends to shareholders every year, but bond interest coupons must be paid ? every six months ? to the bondholders unless the company defaults, a situation that occurs when a company faces extreme financial stress. Even then, while interest payments may cease, the bond holder creditor is usually first in line to receive proceeds from a company bankruptcy or liquidation sale. The accompanying chart shows claim priority in company liquidation to creditors. Secured creditors are paid first, because their debt is secured against (collateralised by) the assets of the corporation. Next comes the rights of the bereft employees for unpaid wages, pension benefits, payroll and other income taxes and trade creditors. Then, unsecured debtors, subordinated debentures, preferred stockholders, and finally, common stockholders receive the crumbs, if there are any left. also pay a dividend, more consistently and in front of a common stock dividend, hence the name preferred. They tend to have a shelf life (maturity date like a bond) and are can have a callable component attached. That is, the company has the right to call the shares back at a certain price whether you want to sell them or not. They cannot participate in the capital appreciation in market value that common stock has. Risks inherent in preferreds are that a troubled company may not be able to either pay the dividend or worse, in a down market, prop up the market price of the preferred stock.A bond that costs $1,000 paying a five percent coupon annually will pay $25 to the bondholder every six months. The bond yield to maturity may be more or less that the coupon rate as it is computed by the market price (premium ? lower yield or discount ? higher yield) paid originally for the bond. Often overlooked in the purchase of stock for dividend pay out, is the real cost, the yield on the dividend. The higher the price paid for the stock, the lower the true yield of the dividend. Chasing yield is not always the best course of action. In reality, no financial decision should be made in isolation. Are you diversified when your portfolio consists of individual stock and bond positions?

The Royal Gazette