Are Preferred Stocks Safer Than Common Stocks?
Preferred stocks are often considered safer than common stocks for several reasons, but the comparison is nuanced.
1. Dividend Priority
One of the main advantages of preferred stocks is their fixed dividend payments, which are paid before any dividends are distributed to common shareholders. In financially stable times, this can provide investors with more reliable income, making preferred stocks a safer option for income-focused investors.
2. Claim on Assets
In the event of a company’s liquidation, preferred stockholders have a higher claim on assets compared to common stockholders. This means that if a company goes bankrupt, preferred investors are more likely to recover some of their investment before common shareholders see any return.
3. Market Volatility
While preferred stocks tend to be less volatile than common stocks, they do not come without risks. Their prices can still fluctuate due to interest rate changes, economic conditions, and the issuer's creditworthiness. Preferred stocks are sensitive to interest rate movements, which can negatively impact their market value.
4. Limited Upside Potential
It's important to note that preferred stocks typically offer less capital appreciation potential than common stocks. While they may provide stable dividends, the potential for growth is generally limited, especially compared to high-flying common stocks.
In summary, preferred stocks can be seen as safer than common stocks due to their priority in dividends and asset claims. However, they are not devoid of risks and may lack significant growth potential. Investors should weigh these factors based on their individual investment goals and risk tolerance.