What advantage does preferred stock have over common stock?

Preferred stock offers distinct advantages over common stock, one of which is the nature of its dividends. Preferred stock often comes with fixed dividends that are cumulative. This means that preferred shareholders receive a predetermined dividend amount regularly, and if the company does not pay out that dividend in any particular year, it accumulates and must be paid before any dividends are paid to common shareholders in the future.

This characteristic provides a level of income stability for preferred shareholders compared to common stockholders, whose dividends can vary based on corporate profits and decisions made by the board of directors. This cumulative feature gives preferred shareholders not only assurance of receiving dividends but also priority over common shareholders in terms of dividends and claims during liquidation started by financial difficulties.

In comparison, other options do not highlight the fundamental benefit of preferred stock clearly. For instance, preferred stockholders typically do not have voting rights, which is often a feature of common stock. Additionally, while preferred stock may have some potential for capital gains, it generally does not offer as much potential as common stock. Finally, preferred stockholders rank below bondholders in the event of liquidation, making the prioritization typically between bondholders and preferred shareholders rather than placing preferred stock above bonds.