Common Stock vs. Preferred Stock: Which One Actually Works for Your Portfolio?

When you hear people talk about “buying stocks,” they’re almost always referring to common stock. The name is fitting—it’s far more common than its cousin, preferred stock. But here’s what most beginner investors don’t realize: these two aren’t just different flavors of the same thing. They’re fundamentally different investment vehicles with separate risk profiles, income patterns, and suitability for different financial goals.

Before you decide which belongs in your portfolio—or if you need both—it’s worth understanding exactly how they differ and what each one actually delivers.

Common Stock: The Path to Wealth Building

Common stock is the engine of company growth and the traditional wealth-building tool for long-term investors. When you own common stock, you’re a genuine owner in the business. This ownership comes with real privileges: voting rights at shareholder meetings and a claim on the company’s future profits through capital appreciation and dividends.

Here’s why common stock matters for wealth accumulation:

The biggest draw is capital appreciation. In a thriving company, the stock price tends to climb over time as earnings grow and investors recognize increasing value. The best-performing American companies have historically delivered returns exceeding 20% annually for decades. Even broader market benchmarks like the S&P 500 have averaged around 10% annually across their entire history. That’s the kind of compounding power that builds real wealth.

Dividends provide the second income stream. While not every common stock pays dividends, many mature companies do—typically quarterly. Quality dividend-paying stocks don’t just pay; they often grow those payouts by 10% annually or more, which helps hedge against inflation and provides compounding income growth.

For tax purposes, common stock holders get a meaningful advantage: you don’t owe taxes on capital gains until you actually sell the stock. This means a position held for 20 years can multiply many times over without triggering annual tax bills, a huge benefit for patient investors.

Companies themselves love common stock because it allows them to raise substantial capital—sometimes billions of dollars—without taking on debt obligations. An IPO (initial public offering) provides an immediate capital injection, and follow-on offerings can fund expansion, acquisitions, or strategic pivots. Unlike bonds, a company financed through common stock alone cannot go bankrupt due to inability to pay dividends. That flexibility is invaluable for growth-stage companies.

Preferred Stock: The Bond-Like Alternative for Income Seekers

Despite its name, preferred stock functions much more like a bond than traditional stock. It pays set distributions on a fixed schedule (usually quarterly), has a par value (typically $25 per share) similar to how bonds have par values, and prices fluctuate inversely with interest rates.

The word “preferred” refers to payment priority: when companies distribute cash, preferred stockholders get paid before common stockholders—but after bondholders. This seniority structure creates an important difference: preferred dividends are more secure because they’re prioritized.

What makes preferred stock distinctive—and sometimes risky—is its unique feature set:

Perpetual life: Unlike bonds with maturity dates, preferred stock can exist indefinitely. A company never has to redeem it, and you could theoretically hold it forever collecting dividends.

Skippable dividends: Here’s the catch—companies can skip or postpone preferred dividends indefinitely without triggering default (unlike bond interest). This flexibility helps companies during tough times but creates uncertainty for investors.

Cumulative vs. non-cumulative structures: Some preferred stock requires the issuer to pay all skipped dividends eventually (cumulative), while others don’t have this obligation (non-cumulative).

Higher yields than bonds: Preferred stock typically pays more than the same company’s bonds because of this added risk, but that doesn’t make them risky for quality companies. A highly-rated financial institution’s preferred stock can still be quite safe.

Industries like real estate investment trusts (REITs), banks, insurance companies, and utilities are the primary issuers of preferred stock. REITs particularly favor cumulative preferred stock because their entire business model centers on distributing earnings; they rarely skip dividends without severe distress. This stability makes REIT preferreds attractive for income-focused investors.

Common Stock vs. Preferred Stock: The Direct Comparison

Growth potential: Common stock can multiply your money many times over in successful companies; preferred stock stays relatively flat near par value.

Income reliability: Preferred stock provides more consistent quarterly distributions; common stock dividends can be cut or eliminated.

Risk profile: Common stock is riskier but offers unlimited upside; preferred stock is safer with defined maximum returns.

Ownership rights: Common stockholders vote at meetings; preferred stockholders typically don’t.

Tax treatment: Common stock capital gains defer taxes until sale; preferred dividends face annual taxation.

Dilution risk: Common stock suffers when companies issue more shares for questionable acquisitions; preferred stock maintains its dividend obligation regardless of dilution.

Upside ceiling: Common stock has unlimited appreciation potential; preferred stock typically won’t exceed par value significantly (unless purchased at substantial discount).

Building Your Strategy: Which Should You Choose?

Choose common stock if you:

• Have decades before you’ll need the money
• Can tolerate price fluctuations
• Want maximum growth potential
• Prefer tax-deferred gains through long-term holding
• Believe in reinvesting dividends for compounding

Choose preferred stock if you:

• Need reliable income today, not someday
• Can’t afford significant price swings
• Have already accumulated wealth and want to preserve it
• Are retired and prefer steady distributions
• Want reduced volatility at the cost of growth

Choose both if you:

• Have a long time horizon but want income now
• Can balance growth needs with current cash requirements
• Want to reduce overall portfolio volatility while maintaining appreciation potential

How to Actually Buy These

Both types trade through any online brokerage, but the mechanics differ slightly. Common stock uses a standard ticker symbol (like PSA for Public Storage). Preferred shares use the base symbol plus a suffix designating the specific series: PSA-PD for Series D preferred, PSA-PE for Series E, and so on.

Be careful when ordering—preferred stock tickers vary by broker (one might use “-D”, another “.D” or “PRD” for the same security). Confirming the exact ticker is essential because a single company can issue dozens of preferred series, each with different terms and call dates.

The Real Bottom Line

Common stock remains the wealth-building tool of choice for investors with time and patience. Its historical returns demonstrate that owning profitable businesses for decades creates substantial compound returns. The tax-deferred nature of capital gains makes the strategy even more powerful.

Preferred stock serves a different purpose—it’s insurance for your income needs. The reliability of distributions and limited downside make it suitable for those prioritizing cash flow over growth.

The question isn’t which is “better.” It’s which aligns with your timeline, cash flow needs, and risk tolerance. Many sophisticated investors use both: common stock to grow long-term wealth and preferred stock to generate current income. Your allocation should reflect your unique situation, not follow a generic template.