Which characteristic differentiates preferred stocks from common stocks?

Preferred stocks are distinct from common stocks primarily because preferred stock dividends are paid before any dividends are issued to common stockholders. This characteristic provides preferred stockholders with a priority claim on the company's earnings. When a company generates profits, it will distribute dividends first to preferred stockholders, which offers them a more stable income stream compared to common stockholders, who may only receive dividends when the company chooses to declare them.

This priority in dividend payments makes preferred stocks appealing to investors seeking reliable income rather than capital appreciation. It is important to note that while preferred stockholders do have a claim on assets and earnings, this claim does not equate to ownership in the same way that common stockholders experience; preferred stockholders typically do not have voting rights in corporate matters. This distinction and the way dividends are structured illustrate why the characteristic of dividend payment precedence is so crucial.