If a company's earnings decline, it might skip its common dividends, but it would discontinue paying bond interest or preferred dividends only as a last resort. For if it did, bond and preferred holders might be able to take control of the company. Furthermore, if a company did fail, bond and preferred holders are ahead of common shareholders in line for the company's assets. In addition, in almost all cases, convertibles will offer a higher yield than stocks. So, if the price of the common falls, the higher yield helps to support the bonds and preferreds.
Leverage describes the price movement of one issue relative to another.
A convertible almost always moves more slowly than its underlying stock. Convertibles are favorably leveraged since they are free to participate in a rise in the stock, but their higher yields limit the extent of any drop. Over the years, studies have shown that convertibles can outperform common stocks over extended periods of time, five years or more. Why this should be so is best explained if we look at what happens in various phases of the market. When the market falls, it' s easy to see that convertibles will do better than stocks.