Common Stock vs. Preferred Stock: Which Is Better for Retirement Income?

When most people think about dividend investing for retirement income, they picture owning shares of a well-known company — Microsoft, Johnson & Johnson, Coca-Cola — and collecting quarterly checks. That's common stock dividend investing, and it's a solid strategy.

But there's a second category that many retirees overlook entirely: preferred stock. It pays higher dividends, behaves differently, and comes with a very different set of risks and rewards. Understanding both — and knowing when each makes sense — can significantly improve the income your portfolio generates.

Let's Start with the Basics

When you buy common stock, you're buying a piece of ownership in a company. If the company does well, the stock goes up and dividends may increase. If it struggles, dividends can be cut and the stock price falls. You're along for the full ride — good and bad.

When you buy preferred stock, you're buying something that sits between a bond and common stock. You typically get a fixed, predetermined dividend — say, 6% annually — that doesn't change. The share price is more stable, but it doesn't grow much either. Think of it less like owning part of a company and more like lending money at a fixed rate.

What Happens to Dividends When Times Get Tough?

This is where the real difference shows up — and it matters enormously for retirees who are counting on that income.

When a company hits financial difficulty, dividends are often one of the first things cut. Common stockholders get cut first — and sometimes completely. Preferred stockholders are protected to a degree: they must be paid their dividend before common stockholders receive anything. And if you own cumulative preferred stock, any missed dividends accumulate and must be paid in full before common stockholders see a dime.

That said, if a company goes truly bankrupt, both common and preferred stockholders are behind bondholders and creditors in the payment line. Preferred stock is safer than common stock in a crisis — but it's not a guarantee.

The Side-by-Side Comparison

Call Risk: The Preferred Stock Catch You Need to Know

One risk unique to preferred stock that trips up many investors is call risk. Most preferred shares are "callable" — meaning the issuing company has the right to buy them back from you at a set price (usually the original par value, often $25 per share) after a certain date.

Companies tend to call preferred shares when interest rates fall, because they can then reissue new preferred shares at a lower rate. The problem for you: if you paid more than $25 for the shares hoping to lock in that nice yield, you'll receive only $25 back when they're called — a loss. Always check the call date and call price before buying preferred shares.

Which Is Right for Retirement Income?

The honest answer: most retirees are better served by a combination of both, used strategically.

Use common dividend stocks for the core of your dividend portfolio. Focus on companies with long histories of paying and growing their dividends — called "Dividend Aristocrats" (S&P 500 companies that have raised dividends for 25+ consecutive years). The growing income stream is your best defense against inflation over a 20–30 year retirement.

Use preferred stocks to boost current income above what common stocks provide, especially in the early years of retirement when cash flow is most important. They work well alongside bonds and fixed annuities as part of your income "floor."

A Simple Framework

Think of your dividend portfolio in two layers:

Layer 1 — Current Income: Preferred stocks, high-yield common dividend stocks, REITs. These pay you more today.

Layer 2 — Growing Income: Dividend growth stocks — companies that may pay less today but grow their dividends consistently year after year. In 10–15 years, these often pay more than the high-yield stocks you started with.