If you ask a group of investors how preferred stocks compare with common stocks,the responses will likely include the following points:
These characteristics help to explain why preferreds are popular among income-focused investors. In determining the role they might play in your own portfolio, it’s useful to get a quantitative feel for terms such as “higher,” “safer,” and “less.”
To inject that sort of concreteness into the discussion, I selected three representative preferreds currently recommended by the Income Securities Investornewsletter. Note that preferred issuance is heavily concentrated in the financial sector. The table below compares the selected preferreds with their corresponding common stocks on the basis of their price performance in the aftermath ofPresident Donald Trump’s announcement of larger-than-expected tariff hikes on “Liberation Day,” April 2, 2025.
In the six days following the tariff bombshell, the three common stocks experienced price declines of 16% to 20%, while the preferreds fell by just 1% to 3%. As of May 21, the preferreds far outyielded the common stocks, 6% to 8% versus only 2% to 3%. For an investor who puts top priority on current income and principal preservation, preferred stocks look like the superior choice.
Inflation Impact
That is by no means to say that common stocks are poor investments. They offer the prospect of long-term price appreciation. In contrast, a nonconvertible preferred purchased at or close to its par value ($25 in the case all three shown in the table) will likely never trade much above that price. Neither, in the case of a fixed-rate preferred, will the dividend rate ever exceed its initial level.
Static income in nominal-dollar terms is problematic due to the erosion in the dollar’s purchasing power over time, otherwise known as inflation. That’s why Income Securities Investor advises its subscribers against holding portfolios composed solely of fixed income instruments. By owning assets that have a history of, and further potential for, increasing their payouts over time, investors can grow their income and thereby offset inflation. Accordingly, the newsletter makes recommendations of not only fixed-rate preferreds and bonds, but also selected closed-end funds, Real Estate Investment Trusts, Master Limited Partnerships, and dividend-paying common stocks. It also issues recommendations of convertible bonds and preferreds, which capture a portion of the price appreciation of their associated common stocks, while generally experiencing less downside.
Risk and Reward
Here are a few more observations to flesh out the common generalizations about preferred and common stocks. Note in the table the specific measures of safety for the preferreds, namely, ratings by Moody’s and Standard & Poor’s. For these three issues, the lower the rating, the higher is the yield. Confirming Milton Friedman’sadage that there is no such thing as a free lunch, the lowest-rated issue suffered the biggest price drop of the three.
A larger sample of preferreds would confirm the point that as with the Morgan Stanley issue’s price decline being smaller than the slightly higher-rated Bank of America one, these relationships don’t invariably line up in perfect order. But risk and reward are inexorably linked. Observe that among the common stocks, the oneassociated with the lowest-rated preferred, Synchrony Financial, posted the biggest price decline.
The Tariff After-Story
On May 12, President Trump pulled back from his aggressive stance of April 2. Trade officials are currently in a period of negotiation aimed at reducing tariffs that other countries impose on the U.S. Since April 8 there has been some price recovery among issues displayed in the table. Time will tell how it all shakes out. But the recent market jolt on the international trade front provided useful data for investors who wish to make their understanding of preferred-versus-common tradeoffs less abstract.
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