In the Intelligent Investor, Graham seems to be very much against buying preferred stock as an individual investor.


The typical preferred shareholder is dependent for his safety on the ability and desire of the company to pay dividends on its common stock. Once the common dividends are omitted, or even in danger, his own position becomes precarious, for the directors are under no obligation to continue paying him unless they also pay on the common. On the other hand, the typical preferred stock carries no share in the company’s profits beyond the fixed dividend rate. Thus the preferred holder lacks both the legal claim of the bondholder (or creditor) and the profit possibilities of a common shareholder (or partner).

I must be really needing some coffee, or does this actually contradict what we see on Investopedia?


Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders.

Could you help me understand this? Thank you for reading thus far 🙏


1 Answer 1


There’s no contradiction. Graham is referencing the covenant that Preferred Shares often include that prevents companies from paying dividends on common stock unless they also pay the preferred dividend. The exact requirements can vary from preferred to preferred. It is often the case the company has no “requirement” to pay preferred holders if they are fine forgoing a common dividend.

Investopedia is referencing that Preferred stock recovers ahead of the common stock in a bankruptcy filing. While this is technically true, in practice the creditors (i.e. the debt) often are impaired in a bankruptcy so they seize control of the company (as the fulcrum security) leaving both the preferred and common shares with zero recovery.

The use of “paid…before” or “paid after” is in no way referring to the timing of payments. This is all about precedence. When we say the preferred dividend must be paid before the common dividend, this is shorthand for the company is required to pay the preferred dividend in order to pay the common dividend.

  • $\begingroup$ Is this like common knowledge that I don't know of? Because what Graham says is actually that dividends are paid to common stocks and preferred stock simultaneously, but investopedia says preferred stock dividends are paid first ("dividends that are paid out to shareholders before common stock dividends are issued" quoted from investopedia) $\endgroup$ Dec 22, 2021 at 20:29
  • 3
    $\begingroup$ @user5646514 It's about precendence, not timing. If a company pays preferred dividends, it can also pay regular dividends. They cannot pay regular dividends unless they pay preferred dividends. If a company suspends regular dividends, it's a warning sign that they can also suspend preferred dividends. $\endgroup$
    – D Stanley
    Dec 22, 2021 at 22:10
  • $\begingroup$ @DStanley Oh! Got it, got it. Do you want to put that in an answer? I guess it was your comment that finally made me realize (Sorry cpage) $\endgroup$ Dec 23, 2021 at 8:37
  • $\begingroup$ I'll give cpage a chance to clarify that first since his answer is correct also. $\endgroup$
    – D Stanley
    Dec 23, 2021 at 14:53

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.