Limitations of Issuing Preferred Stock

What are the Limitations of issuing preferred Stock ?

1. Preferred dividends are not tax-deductible as interest on debt would be.
2. The cost of capital of preferred stock is usually higher than that of a bond because of the non-taxdeductibility of the dividend and also preferred stock may not be as attractive to investors as a bond.
3. If the dividends are cumulative, the company must “make up” any dividends not declared and paid during periods when profits are low or nonexistent before any future dividends can be paid to common shareholders.