Preferred vs common stock for dividend investors
| Feature | Preferred | Common | |---|---|---| | Dividend | Fixed; must be paid before common | Variable; discretionary | | Dividend growth | Typically none | Can grow annually | | Voting rights | Usually none | Yes | | Capital appreciation | Limited (trades near par value) | Unlimited upside | | Priority in bankruptcy | Above common shareholders | Last in line | | Best for | Fixed income supplement | Long-term income growth |
When preferred stock makes sense
Preferred shares can appeal to retirees who want bond-like income security with slightly higher yields than investment-grade bonds and exposure to corporate credit rather than government credit. They work well as a small allocation within a broader income portfolio.
However, because preferred dividends are fixed and don't grow, they provide no inflation protection over time. For most long retirements, a larger allocation to dividend-growth common stocks will deliver better purchasing power preservation.
Tax treatment
Some preferred dividends qualify for the lower qualified dividend tax rate. Others (particularly from financial institutions) may be taxed as ordinary income. Check the fund prospectus or individual security documentation.
Related terms
- Common stock — the equity class that forms the core of most dividend portfolios
- Dividend yield — preferred stock yields are typically higher but fixed
- Ordinary dividend — many preferred dividends are taxed as ordinary income