Investment Flexibility: Holding Both Common and Preferred Stocks of the Same Company

Introduction

Investors often wonder if they can hold both common and preferred stocks of the same company. The answer is a resounding yes. This strategy allows for greater flexibility and diversification in investment portfolios. This article explores the key differences, considerations, benefits, and the reasons why this combined approach can be advantageous.

Key Differences Between Common and Preferred Stocks

Common Stocks

Common stocks offer shareholders several rights and benefits, including voting rights and dividends, which can vary based on the company’s performance.

Voting Rights: Holders of common stocks have the right to vote on critical company matters, such as electing the board of directors and approving major corporate decisions. Variable Dividends: Dividends are not guaranteed and depend on the company's earnings and management decisions. They can vary from year to year. Potential for Higher Returns: If the company performs well and appreciates in value, common stockholders can benefit from capital gains.

Preferred Stocks

Preferred stocks offer a more stable and predictable income but come with fewer rights compared to common stocks.

No Voting Rights: Preferred stockholders do not typically have the right to vote on company matters. Fixed Dividend Rate: Preferred stocks generally pay a fixed dividend rate that is usually higher than the dividend rate for common stocks. Priority in Liquidation: In the event of a company's liquidation, preferred stockholders are paid off before common stockholders.

Considerations and Benefits

Investment Strategy and Diversification

Combining both common and preferred stocks in a single portfolio can offer a balanced approach to investments. Common stocks may provide opportunities for significant capital appreciation during growth periods, while preferred stocks offer more consistent income through fixed dividends.

Risk Tolerance and Return Expectations

The decision to hold both types of stocks should align with your risk tolerance and investment goals. Common stocks are generally considered higher risk but can yield higher returns in the long term. Preferred stocks, on the other hand, are typically less volatile and provide a more stable income stream.

Practical Considerations

Before deciding to invest in both common and preferred stocks, consider several factors:

Your investment goals and how this strategy fits into your overall investment plan.

Your tolerance for risk and the potential impact on your portfolio.

The specific characteristics and terms associated with the preferred and common stocks you are interested in.

The current market conditions and the performance history of the company.

Examples and Evidence

It is commonplace for investors to hold both common and preferred stocks of the same company. For instance, both common and preferred shares of Citigroup can be purchased on the same exchange. Many investors find value in owning a mix of these securities, especially in industries like banking, utilities, and REITs (Real Estate Investment Trusts).

Preferred shares are particularly appealing for those seeking stable income. They offer a higher yield and are often issued for a fixed period (also known as a call date) after which they can become non-voting. Some preferred shares are issued in perpetuity, providing a more enduring source of income.

Conclusion

Whether an investor decides to hold both common and preferred stocks of the same company depends on their unique circumstances and investment objectives. Understanding the differences and potential benefits can help guide the decision-making process. By diversifying your portfolio, you may achieve a more balanced and potentially more profitable investment strategy.

Further Reading

For those interested in exploring this investment strategy further, the following resources may be useful:

The Best And Worst Ways To Buy Preferred Shares

Disclaimer: The author holds individual preferred shares and a preferred ETF but is not a professional investor. It is essential for individual investors to perform due diligence before making any investment decisions.