A:

Before we answer this question, let's just take a quick review of what a stock's yield is actually measuring.

The yield is calculated by taking the stock's annual expected dividend and then dividing that number by the stock's current market price, which results in a coefficient that is usually expressed in percentage terms. A yield can be calculated for any class of stock that pays a dividend. For example, assume the common stock of XYZ Inc. pays an annual dividend of $0.50 per share, and the current stock price is $15 per share. The yield on this stock is currently 3.33% ($0.50/$15), and represents the amount of dividends a shareholder will receive for every dollar invested. In this case, an investor will receive about $0.033 (3.33%) for every $1 used to purchase XYZ Inc common stock at the current market price.

Now that we know what a yield is, we can now answer the question: why do some preferred stocks have a higher yield than common stocks?

The reason as to why this is lies in the numerator of the equation: dividends. Traditionally, preferred shares offer a higher annual dividend per share over common stock, but there are some draw backs to this privilege. By purchasing preferred shares (which is usually done by large investors and insiders), the purchaser gives up the right to vote on matters affecting the shareholders and there is less of a chance for price appreciation when holding preferred shares. In other words, the incentive to owning preferred shares is the dividend. If this is the only incentive, or most prominent one, then the dividend must compensate the investor for the lack of price appreciation in shares, which is one of the major incentives for holding common stock. The higher the dividend is for a given price per share, then the higher the stock's yield will be.

To learn more about preferred shares, please read A Primer On Preferred Shares.

RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. What are the dividend reinvestment options for a mutual fund?

    There are two primary choices for how investors can choose to handle dividend distributions made by mutual funds that they ... Read Full Answer >>
  3. What are ComputerShare's escheatment services?

    Escheatment is the process by which ownership of abandoned property is transferred to the state. Escheated property can include ... Read Full Answer >>
  4. Do mutual funds pay dividends or interest?

    Depending on the type of investments included in the portfolio, mutual funds may pay dividends, interest, or both. Types ... Read Full Answer >>
  5. Should I sell my shares if a company suspends its dividend?

    Since 2008, when the Federal Reserve slashed interest rates to zero and then kept them there indefinitely, dividend-paying ... Read Full Answer >>
  6. Do hedge funds pay dividends?

    Hedge funds rarely pay dividends to the accredited investors who invest directly in them. Instead, these investors share ... Read Full Answer >>
Related Articles
  1. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  2. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  3. Investing Basics

    Contingent Convertible Bonds: Bumpy Ride Ahead

    European banks' CoCos are in crisis. What investors who hold these high-reward but high-risk bonds should know.
  4. Investing Basics

    4 Things That Make a Stock a Safe Bet

    No investment is a sure bet, but you can reduce your chances of taking a loss by choosing fair-priced stocks with growth potential and low volatility.
  5. Investing Basics

    The Complete Guide to Financing an Investment Property

    If you're considering adding an investment property to your portfolio, you need to know what your options are for financing its purchase.
  6. Investing Basics

    A Beginner's Guide to Investing in Company Stock Plans

    There are certain advantages to investing in your employer's stock but there are some potential drawbacks to be aware of.
  7. Stock Analysis

    The 5 Best Stocks That Pay Monthly Dividends (PSEC, LTC)

    Get the scoop on five of the best stocks that pay regular monthly dividends, offering investors looking for regular income dividend yields of up to 16%.
  8. Stock Analysis

    The Top Rated Dividend Paying Stocks for 2016 (ABBV, BA)

    Discover five of the top-rated stocks that pay investors solid dividends that you may want to consider adding to your investment portfolio in 2016.
  9. Mutual Funds & ETFs

    The 4 Best Indexes for Dividends

    Learn about some of the biggest dividend indexes in the marketplace and which niche of the dividend universe each of these indexes targets.
  10. Mutual Funds & ETFs

    The 3 Best American Funds for the Income Seeker in 2016

    Learn about American Funds' mutual fund offerings, their past performance compared to peers and three American funds to consider for income investors.
RELATED TERMS
  1. Record Date

    The cut-off date established by a company in order to determine ...
  2. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through ...
  3. Profit Margin

    Profit margin is part of a category of profitability ratios calculated ...
  4. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  5. Security

    A financial instrument that represents an ownership position ...
  6. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating ...
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center