Anyone who has traded stocks even a little has probably run into this.
Two shares of the same company: one pays a bigger dividend and costs less, yet somehow only the other one rises and gets all the news.
At first the market feels irrational. Over time, that turns into resignation: “I guess preferred shares just don't go anywhere.”
But this is not a matter of luck or popularity.
Look a little closer at how the market is built, and it becomes surprisingly simple to see why higher-dividend preferred shares always trail behind, and why money always flows in the same direction.
This piece tries to explain, in the plainest language possible, why preferred shares are not “bad stocks” but “stocks treated differently.”
- Where it starts: preferred shares lag despite better dividends
Preferred shares pay more in dividends and look cheaper, so why do common shares always rise more and trade more actively? Almost every individual investor asks this at some point.
It happens not because the market is irrational, but because the way stock prices are formed reflects supply and demand and shareholder rights far more than dividends.
- When you buy a stock, you buy rights and liquidity, not just dividends
A stock is not simply a cash-flow product. It is an asset that combines cash flow, rights and liquidity.
Preferred shares can come out ahead on cash flow in the form of dividends, but they are often structurally disadvantaged on voting rights and liquidity.
Voting rights are the right to take part in a company's key decisions at the shareholders' meeting, such as mergers, spin-offs, share buyback cancellations and the election of directors.
Preferred shares (shares that take priority over common shares in dividends or in the distribution of remaining assets, but carry no or limited voting rights)
- Liquidity is the market's most important yardstick
The biggest money in the market always puts liquidity first.
Large institutional investors, pension funds and ETF money prefer stocks where buying and selling moves the price as little as possible.
By this measure, common shares always have the upper hand over preferred shares.
As a result, the side where trading concentrates sets the price, and supply and demand then reinforce that price, in a cycle that keeps repeating.
- The common-share premium seen at Hyundai Motor
This structure shows up very clearly at Hyundai Motor.
Hyundai Motor's preferred shares have often had a meaningfully higher dividend yield than its common shares.
At times, the common shares yielded in the 3 percent range while the preferred shares yielded around 5 percent.
On dividends alone, the preferred shares look far more attractive, but in rallies the common shares usually moved first and by more.
- The more events a company faces, the wider the gap
That is because at companies like Hyundai Motor, which face many variables and events such as the economic cycle, policy, labor unions and the shift to electrification, voting rights and trading demand are worth more.
Issues such as share buybacks, share cancellations and governance restructuring move the stock price far more than dividends do.
At such times, the market puts a premium on the common shares directly tied to the event, and the preferred shares' price tends to follow behind.
- The limits of dividends at Samsung Electronics
The Samsung Electronics case offers a lesson from a different angle.
Both Samsung Electronics' common and preferred shares are mega-cap stocks, but the difference in their dividends is relatively small.
Based on observations, there have been many stretches where the dividend yield gap between the common and preferred shares was under 1 percentage point.
A dividend gap this small can hardly make up for the lack of voting rights and weaker trading demand.
- Why they look cheap but never get re-rated
This is why Samsung Electronics' preferred shares always look cheap, yet go through repeated stretches where the market never re-rates them in a big way.
The market tends to price Samsung Electronics' preferred shares not as a dividend product, but as a discounted product with weak trading demand.
This is less a market mistake than the result of large funds following their own logic very faithfully.
- How far can dividends protect you?
That leaves one question: how far can preferred shares hedge through dividends?
The principle is simple.
For the returns to come out roughly even, the preferred shares' extra dividend yield has to offset however much less they rise each year than the common shares.
- Realistic hedge ranges for Hyundai Motor and Samsung Electronics
Take Hyundai Motor: if the preferred shares' dividend yield is about 2 percentage points higher than the common shares', dividends can cover the common shares outperforming by up to about 2 percent a year.
But in a market where the common shares outperform by 5 percent or more a year, driven by trading demand, dividends alone can hardly close the gap.
For Samsung Electronics, the dividend gap often stays in the high 0 percent range, so dividends can hedge less than 1 percent a year of common-share outperformance.
Under this structure, the appeal of Samsung Electronics' preferred shares depends far more on whether the price gap narrows than on dividend protection.
BITPRESS Insight
Preferred shares are valued on dividends; common shares are valued on trading demand.
Dividends are one-off payments that arrive once a year or each quarter, while trading demand is a steady force that pushes the price up every day.
In bull markets, or when a policy or theme takes hold, this gap widens even faster.
Preferred shares are closer to defensive, cash-flow-focused assets, while common shares sit at the center of price discovery, absorbing money flows and events.
So the sensible way to choose between preferred and common shares is not by dividend yield, but by first judging what phase the market is in.
Sources
https://finance.daum.net/quotes/A005380
https://finance.daum.net/quotes/A005385
https://finance.daum.net/quotes/A005930
https://finance.daum.net/quotes/A005935
https://kr.investing.com/equities/hyundai-motor-dividends
https://kr.investing.com/equities/samsung-electronics-co-ltd-dividends
