Why Buy Preferred Stock Instead of Common?

by W D Adkins ; Updated July 27, 2017

Preferred stocks are equity securities as are common stocks. That is, they give the shareholder part ownership in a company, although preferred stock doesn’t usually have voting rights at shareholders' meetings. The main distinction for investors is that preferred stocks are considered fixed-rate income securities. Investors who buy preferred stock instead of common are usually those who are seeking investments that provide income rather than equity growth.

Larger Dividends

Almost all preferred stock issues pay larger dividends than the common stock issued by a given corporation. Rates are usually comparable to bond yields.

Guaranteed Rates

The dividends paid on preferred stock are guaranteed. Most preferred stock is cumulative, meaning dividends must be paid retroactively if a company must skip a dividend payment.

Priority

Preferred stock dividends must be paid in full before any dividends can be paid on shares of common stock. This includes any accumulated dividends.

Volatility

Preferred shares are not as sensitive to market fluctuations. Though less likely to appreciate, they are also less likely to fall in price.

Risk

In the event a company should liquidate for any reason, preferred stock shareholders are paid first before any money is paid to holders of common stock.

About the Author

Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.