Financial Word of the Day: Preferred Stock
- Larry Jones
- Aug 12
- 2 min read
Preferred stock might not get the same spotlight as common stock, but it’s the quiet moneymaker in many investor portfolios. If common stock is the flashy lead singer, preferred stock is the drummer—steady, dependable, and always keeping the beat.
What is Preferred Stock?
Preferred stock is a type of ownership in a company that has a higher claim on assets and earnings than common stock. That means if the company pays dividends, preferred shareholders get theirs first. If the company goes belly-up (let’s hope not), preferred shareholders also get paid before common stockholders—though still after bondholders.
It's called “preferred” because, well, it's treated better in a few key ways:
Priority dividends: Paid before common stockholders and usually at a fixed rate.
Less volatility: Prices don’t swing as wildly as common stocks.
Limited or no voting rights: You typically don’t get a say in corporate decisions—but you're not in it for the politics, you’re in it for the paycheck.
Why Should You Care?
Preferred stock can be a smart choice if you're after reliable income and a little more peace of mind. It’s especially appealing to income-focused investors like retirees, or anyone looking to add a more stable stream to their portfolio.
Think of it like this:
Common stock = growth potential + voting rights + higher risk.
Preferred stock = steady dividends + less drama, but less upside.
If you're the type who’d rather collect consistent checks than ride the stock market rollercoaster, preferred shares might be your kind of ride—smooth and steady.
Real-Life Example
Let’s say you’re looking at XYZ Corporation. They offer both common and preferred shares. You buy 100 shares of XYZ Preferred Stock, which pays a fixed 6% annual dividend. That’s $6 per share, or $600 a year in income, like clockwork—assuming XYZ doesn’t go off the rails.
Now, if XYZ decides to skip a dividend payment to common shareholders during a rough quarter? You’re still at the front of the line. Preferred stockholders get theirs first (and in some cases, they’ll be owed the missed payments later—this is called cumulative preferred stock).
Speak the Language of Preferred Stock
You might hear it used like this:
“I’ve added some preferred stock to my retirement account—it doesn’t grow like a tech stock, but the income’s dependable.”
Or:
“If you’re looking for yield and don’t care about voting, preferreds are a smart play.”
Final Thought
Preferred stock isn’t for everyone—but it is for those who like income, stability, and a little less stress in their investing life. It’s one of those tools the wealthy often use for predictable cash flow, and now you’ve got it in your financial vocabulary, too.
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