A company has issued only one class of common shares and it does not pay dividends on them. It has also issued two types of preference shares - one that is putable and the other callable -and both have a non-cumulative feature. Which of these securities will most likely offer the lowest expected return to the investor?
Putable preference shares are less risky than their callable counterparts. They give the investor the option to put the shares back to the company. Because of the lower risk they will provide a lower expected rate of return. Common shares are the most risky, whether or not they are dividend paying, and are likely to offer the highest expected return.