What Are the Pros and Cons of Preferred Stock?

When I was a stock broker a weekly question that I would receive would be, "What are the pros and cons of preferred stock?" Many people look at the larger dividend of a preferred stock and think that that fact alone makes them better then common stocks. The truth is there is good and bad with preferred stock and before you choose whether to invest in preferred stock or not, you should weight out all the pros and cons.

To start with, preferred stocks do usually carry a higher dividend versus common stocks. This price is set beforehand and one nice feature with the dividend of a preferred stock is that it pays out first, before any common stockholders get their dividend. This can ensure that you get your divined when times are lean for a company, where a common stockholder may miss out. So in this sense, preferred sticks are on the safer side.

However, with higher safety a lower reward is usually the case. Preferred stocks can fluctuate like common stocks, but they will not have the chance to jump up to astronomical heights like a common stock will. On the other hand, they are typically a lot more stable and don't have the tendency to tank like common stocks might when things go wrong in the market.

Another drawback is that preferred stocks carry no voting right. This may or may not be a big deal to you as many people these days just seem to send in their common stock proxy statements when it comes time to vote for anything.

Another nice perk with preferred stocks is that they are ahead of common stocks in the case of a company going under. While you may not get all of your money back and you do have to play the subordinate to bond holders, if there is anything left after the bond holders are paid you will get a share before common stockholders do.

As with anything else in life, preferred stocks have their good points and their bad points and while their good points may entice some to buy, they will dissuade others. If you are interested in buying some preferred stocks for your portfolio, as always, I suggest that you first sit down with your financial advisor and discuss in great detail if the options is right for you.

Source: Investopedia, Preferred Stock Definition, Investopedia.com