Preferred Stock vs. Common Stock: What Is Better?

Many investors are familiar with the concept of preferred and common stock. Both types give holders a share in company ownership and serve as investment options for those looking to benefit from the company’s future growth.

That said, there are important differences between preferred and common stock that investors should be aware of.

What Is The Difference Between Preferred And Common Stock?

Preferred and common stocks are two types of company shares with different features. Preferred stock usually pays fixed dividends and gives shareholders priority for payments if the company faces financial trouble, though it doesn’t offer voting rights and has less growth potential. Common stock, however, often gives voting rights and has more room for price increases, though its dividends aren’t guaranteed and can change based on company performance. Common stock is more volatile, meaning it’s riskier but can offer higher returns over time.

What Is Better, Preferred Or Common Stock?

When choosing between preferred and common stock for retirement investing, each type has its unique benefits and drawbacks depending on an investor’s goals, risk tolerance, and income needs.

Preferred Stock

Pros:

Stable Income: Preferred stocks typically pay a fixed dividend, making them more stable and reliable for income-focused investors. This regular income can help retirees cover living expenses.
Priority in Payouts: Preferred shareholders have priority over common shareholders in receiving dividends and, in cases of liquidation, claim on assets.
Less Volatility: Preferred stocks generally experience less price fluctuation than common stocks, which can help protect against market volatility, particularly in the short term.

Cons:

Limited Growth Potential: Preferred stocks generally lack the potential for capital appreciation that common stocks offer. This can limit growth over time, which might not keep pace with inflation.
Interest Rate Sensitivity: Preferred stocks can be affected by interest rate changes, as rising rates often make their fixed dividends less attractive, impacting share prices.

Common Stock

Pros:

Higher Growth Potential: Common stocks offer more growth potential, which is good for retirees who want their investment to grow over the long term.
Dividend Increases: Some common stocks pay dividends that can grow over time, helping retirees keep up with inflation.
Voting Rights: Common shareholders often have voting rights in company decisions, which can be attractive for those who want to have a say in the direction of the companies they invest in.

Cons:

Higher Risk: Common stock prices are more volatile and carry a higher risk of losing value, especially in market downturns.
No Dividend Guarantee: Unlike preferred stocks, common stock dividends aren’t guaranteed and can be reduced or suspended during hard times.

Which Is Better for Retirement?

The choice depends on your retirement goals:

Income Stability: If your priority is a steady income and lower volatility, preferred stocks can be a good choice. They offer a predictable income stream, which can help stabilize retirement cash flow.
Growth and Inflation Protection: If you want to grow your retirement savings and protect against inflation, common stocks may offer better returns over time, despite the added risk.

A Balanced Approach

Many retirees find a balanced approach—holding both preferred and common stocks—meets their need for income stability and growth potential. Combining these can help create a diversified portfolio with both stability and growth opportunities.

What Is 7% Preferred Stock?

A 7% preferred stock is a type of preferred stock that pays a fixed dividend equal to 7% of its face (or par) value each year. For example, if the par value of the preferred stock is $100, a 7% preferred stock would pay $7 per year in dividends to each shareholder. This fixed dividend rate makes it an attractive option for investors seeking stable income, as the 7% payout remains consistent regardless of the company’s performance. However, preferred shareholders usually don’t have voting rights and may see limited price growth compared to common stock.

Want to learn more about common and preferred stock? Contact Zynergy Retirement Planning today.