Question

And then there is the issue of the dividend yield: if interest rates are rising, then the preferred stock becomes less valuable and trades at a lower price. And preferred stock is usually more expensive to purchase than common stock anyway. If you were to purchase a business’ stock, would you purchase preferred stock because of the dividend preference, or common stock?

Answer 1

Preferred Stocks are not "better" than common stocks. They simply behave differently in your portfolio.

A Preferred Stock is very much like a bond, but usually without an expiration date. So, it will often pay a preset dividend that must be paid BEFORE any dividends can be paid on the common stock. Preferred Stocks usually are issued at a PAR value. However, unless something is drastically wrong with the company itself, or the markets are in turmoil, the market values of preferred stocks of well-known companies usually do not fluctuate as much as their common stocks.

Common stock has far more opportunity for appreciation than preferred stocks, they are often more volatile, and generally do not pay as high a dividend as the preferred stock. Preferreds are also issued in "tranches," meaning that there are often several versions of preferred stocks, while there is usually only one version of a company's common stock.

Investors typically buy preferred stocks for their income potential, and common stocks for their growth potential. On trading platforms and portfolio management software, preferreds are often treated as "fixed income" securities, since they do behave quite similarly to high-yield bonds.

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