There are tons of securities you can buy on a given day. So knowing what you are buying and why you are buying it is vital to long-term success.
Most investors will purchase common stocks inside their various portfolios. However, many other options exist, including treasury bonds, Series “I” Bonds, closed-end funds, and mortgage REITs.
In fact, many of our favorite companies offer common stocks and preferred shares. But what is the difference, and which is the better buy for your investment goals? Let’s begin.
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Debt vs. Equity. To understand preferred shares versus common stocks, you must first understand debt vs. equity.
When a company assumes debt, they take a loan or sell bonds to raise capital to conduct business. Banks and bondholders lend money at a cost, which we call interest. They do not assume ownership (including voting rights) of the company, only the debt (loan, bonds).
Investors who invest in equity (shareholders) have ownership stakes in the company. If the company does well, shareholders can profit from these good fortunes. The reverse is true if the company tanks.
For the most part, shareholders also receive voting rights and can receive a portion of the profits in the form of dividends. They can also benefit from stock splits, mergers, and special dividends.
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Unlimited upside potential. Shareholders have unlimited upside when investing in common stocks. They can buy a stock for $5, which can travel to $3,000 and beyond.
However, bondholders are first on the liquidation list if the stock goes to zero and the company goes bankrupt. After the courts determine all of the debt and preferred shares, the equity shareholders may receive whatever is left over.
To recap, common stockholders receive voting rights, dividends, and unlimited upside potential. Bondholders receive interest payments and are higher on the liquidation list in case of a business failure.
Preferred shares vs. bonds. Preferred shares are not debt; they are equity. However, they are higher on the liquidation list than common stock. In fact, they function almost entirely like bonds, except they trade openly on the stock market.
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Baby bonds are debt and act precisely like preferred shares. Companies can only pay dividends on common stocks once they pay all preferred share dividends.
Buying corporate bonds is extremely challenging for the average investor. Not only are the bonds in denominations of $1,000, but you must purchase hundreds of thousands of dollars at once.
That’s why it’s easier to buy corporate debt inside bond ETFs like my favorite high-yield bond fund (JNK).
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Preferred shares allow us to buy fixed-income corporate debt in denominations of $25. Fixed income plays an integral part in our long-term investing goals.
Fixed income vs. building a nest egg. To become wealthy, you need an income stream and a nest egg.
For example, let’s say you own a home. Your house value slowly grows each year you live there. However, it is tough to TAP into your home equity to pay your monthly bills.
You can create income by renting rooms while you live in the home. Therefore, your house value rises over time, and you have passive income from room rentals. This is how you become wealthy—you have excess income versus expenses.
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The same mindset applies to your stock portfolio. While it’s great to have your dividend growth stocks growing and compounding, you’ll need cold, hard income every month.
The two sides of Public Storage. One of the best examples is Public Storage (PSA), a self-storage real estate investment trust.
I own 2.8 shares of PSA common stock at $263/share. The current price is $282, which gives me a 7% unrealized gain. I am getting around a 3% dividend yield on cost.
I also own 16 shares of Public Storage Preferred Shares P (PSA.P). It yields 4%; however, I didn’t buy them at the par value of $25. As you can see, my average price is $17.44, giving me a yield on cost of 5.7%.
Even better, when PSA calls this preferred share, it will get the par of $25, giving me a profit of $7.56 per share. I get a high yield plus some capital gains—not bad.
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Which is better in the long run? My PSA.P preferred shares won’t be around forever. The company can call it June 2026. If I want to leave generational wealth, I will not do it with this security.
However, PSA common stocks may be around for the next one hundred years. It has unlimited upside and dividend potential. I only need to check up on the company every few months.
To find the best time to buy PSA.P I will need to follow interest rates—preferred shares trade opposite treasury bonds.
For example, the two-year Treasury Note trades at 4.23% today (12/21/2022). That means I can get a risk-free 4.23% bond. Why would I buy a higher-risk corporate preferred at 4%?
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The yield would need to increase to make PSA.P more appealing to risk investors. The price would need to be lower to increase the yield. That’s why PSA.P traded around $18 for a yield of 5.88% today.
I would buy preferred shares specifically to get an excellent yield for 5-10 years. I would buy PSA common stock to participate in voting, dividend growth, and capital appreciation for 20-50 years.
Conclusion. It is tough to find preferred shares on most platforms. Apps like Cash app, STASH, and M1 Finance do not have access to preferred shares.
It’s much easier to find common stocks, and you can buy fractional shares and utilize dollar-cost averaging. Buying common stocks is a more investor-friendly method.
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However, you can find fantastic deals once you find a platform to buy preferred shares and follow them on the PreferredStockChannel.
There is nothing like knowing what you are getting exactly—this is what you get with preferred shares.
There is nothing like being surprised—this is what you get with common stocks. For example, PSA paid a one-time $13.15 per share special dividend in August 2022. That is over six times the standard $2.00/share quarterly dividend.
You would buy BOTH preferred shares and common stock in a perfect world. However, common stock is more readily available and requires much less effort.
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Once you get the hang of investing, I would recommend dabbling in preferred shares. Nothing makes my day more than buying high yields at great prices. The only thing better is receiving the dividends.
I will leave you with a quote from John D. Rockefeller. “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” I agree (except my family also gives me pleasure). Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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