Advantages of Buying Preferred Stocks

Every company issues different kinds or classes of stocks at the same time; giving you choices on what kind of stock you would actually prefer to own. There can be choices of class 1 common stocks, class 2 common stocks that only have a certain number of votes per share, and the class 3 preferred stock.

man choosing Preferred Stock in hologram screen

Having a company’s preferred stock often offers certain advantages compared to the other classes of stocks. Of course it’s not all positive, there has to be some kind of balance, but in this article we’ll be discussing why you should buy preferred stocks when given the option.

Reason #1: Regular dividend payments
What a preferred stock is has been tackled in the previous articles, but for a brief explanation, a preferred stock is a hybrid type of security which has properties of both common stocks and bonds. Owning a preferred stock means that you will mostly get paid higher and have more regular dividends than the owners of the company’s common stock. This means that payment will come in more regularly. Also, the company has an obligation to pay you back missed preferred dividend payments if any.

Reason #2: In an event of bankruptcy…
Most preferred stock owners enter the investment due to attractive dividend yields; sometimes they even surpass that in the bond markets or the consistent income. But if a time comes that the company files for bankruptcy, you as a preferred stockholder will have seniority over claiming of the remaining funds and assets raised through liquidity. You will be paid before the common stockholders do.

Reason #3: Taxes
A company can claim tax reductions against the amount of interest paid on bonds but not on dividends paid on preferred stocks. This is due to dividends on both common and preferred stocks being paid through the company’s after-tax profit. But there is also tax advantage for certain corporations that invest in preferred shares in the stock market. The tax favor is referred to as dividend received deduction. This will prevent the investing corporation from being overtaxed in a venture.

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