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.

RELATED FAQS
1. ### What is Common Stock and Preferred Stock?

Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ... Read Answer >>
2. ### What size of annual dividend yield is typical of companies in the financial services ...

Learn the importance of calculating the annual dividend yield and how income investors can use it to analyze companies in ... Read Answer >>
3. ### What factors drive share prices in the aerospace sector?

Learn about the average annual dividend yield for companies in the electronics sector and understand why the average is a ... Read Answer >>
4. ### What is the difference between preference and ordinary shares?

Preferred shareholders have a higher priority claim to the assets of a corporation in case of insolvency than common shareholders. Read Answer >>
5. ### Which companies in the chemicals sector pay the highest dividends?

Learn what the average annual dividend yield of insurance companies is and which factors should be considered when choosing ... Read Answer >>
6. ### Which is more important - dividend yield or total return?

Learn to distinguish between those times when dividend yield or total return is a more useful performance metric for a company's ... Read Answer >>
Related Articles
1. Managing Wealth

### The Advantages of Preferred Dividends

Preferred dividends are cash distributions a company pays on its preferred shares.
2. Investing

### What are Preference Shares?

Preference shares, also referred to as preferred shares, are equity shares that give the shareholders certain rights ahead of common shareholders. For instance, when the corporation declares ...
3. Investing

### Dividend Yield For The Downturn

High-dividend stocks make excellent bear market investments, but the payouts aren't a sure thing.
4. Investing

### Looking for Yield? Check Out This Preferred Stock ETF (PFF)

Take a look at a review of the performance of the most popular preferred stock ETF, the iShares U.S. Preferred Stock ETF from BlackRock.
5. Investing

### A Primer On Preferred Stocks

Offering both income and relative security, these uncommon shares may work for you.
6. Investing

### The 3 Biggest Misconceptions of Dividend Stocks

To find the best dividend stocks, focus on total return, not yield.
7. Investing

### Due Diligence On Dividends

8. Managing Wealth

### An Example of Dividends in Arrears

Learn about the concept of dividends in arrears and which shares of stock guarantee payment of accrued dividends even if the company doesn't turn a profit.
RELATED TERMS
1. ### Preferred Stock

A class of ownership in a corporation that has a higher claim ...
2. ### Indicated Yield

The dividend yield that a share of stock would return based on ...
3. ### Preferred Dividend

A dividend that is accrued and paid on a company's preferred ...
4. ### Preference Shares

Company stock with dividends that are paid to shareholders before ...
5. ### Dividend Yield

A financial ratio that shows how much a company pays out in dividends ...
6. ### Current Dividend Preference

A safety feature of preferred shares, whereby holders of such ...
Hot Definitions
1. ### Interest Expense

The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
2. ### Call Option

An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
3. ### Pro-Rata

Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
4. ### Private Placement

The sale of securities to a relatively small number of select investors as a way of raising capital.
5. ### AAA

The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
6. ### Backward Integration

A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...