Stock Types Explained: Essential Info

In this article, we will cover some types of stocks related to their class (Common, Preferred, Class A/B) or the company’s characteristics (Dividends, Growth, Quant, Value). A publicly traded company can issue various types of stocks to offer different advantages to a shareholder. In addition to this, each company has a specific characteristic that must be assessed before investing.

Types of stocks (Classes)

There are many classes of stocks in the stock market. You can find great sources in the following articles [1], [2], and [3]. Let’s make a short brief about some of them:

1. Preferred stock: The name says it all. The shareholder has a “preference” for something that, in this case, can be a fixed dividend payment similar to a bond. If the dividend is fixed, then it’s clear that the price of this stock won’t move like the common stock since the benefit is previously known. However, it doesn’t matter what happens… the company has to honor the payment. In addition to that, the holders of preferred stocks have priority (in relation to common shareholders) to receive the net cash of a company if it fails. This stock class is commonly used by companies to finance themselves at a lower cost than a loan.
2. Common stock: Different from the preferred stock, the price will follow the company’s financial results. This class represents much more potential for long-term returns and also voting rights. It can receive dividends but normally they are often lower than the preferred stocks.
3. Class A/B: These classes are used to grant different power to the shareholders. Some classes provide much more voting power per share. This can be a very useful tool to decide which group will have more decision power regarding the future of the company. Berkshire Hathaway is a good example. The company has BRK-A ($466.000) and BRK-B ($308). Why the BRK-A is 1500x more expensive? Class A shares have MUCH more voting power and represent a larger share of the equity value.

Types of stocks (company characteristics)

Dividend stocks

A dividend represents the amount of profit distributed by a company to its shareholders. In addition to the existence of profit, the company needs to have cash available to pay. According to the objective of the company, the board decides the number of dividends that will be distributed in a specific quarter. You can take a look at this article about undervalued dividend stocks.

Specific markets like finance, energy, and insurance tend to pay regular dividends. This happens because of the low investment needs in the business, strong regulation, and some characteristics of a natural monopoly. Regular payments are more likely from mature companies already well-settled in the market.

When a company decides to distribute part of its profits, then it’s abdicating to invest that money to expand its business. The shareholder will receive the dividends based on the number of stocks it holds.

Important to say is that the receipt of dividends doesn’t increase the shareholder’s wealth in the short run. If you hold 100 stocks valued at $10, your wealth is $1000. If the company pays $5 per share of dividends, then you’ll get $500 total. But, on the day after the payment (called the ex-dividend date), the stock price will be automatically adjusted to $5 ($10 – 5$ of dividends). Your wealth will be 100 stocks valued at $5 plus $500 of cash. Still $1000 of wealth. So, what’s the point?

The main idea to invest in a company capable of paying regular dividends is the possibility to get your $500 of cash and repurchase the stock at a lower price ($5 in our example). If the company still has the ability to pay $5 per share or more in the future, then your dividend yield will increase over time and you’ll be able to generate a considerable amount of passive rewards.

Let’s take a look at the Top-3 “4Y Average Yield” indicator:

1. Warrior Met Coal, INC (HCC) – 10,85%
2. CTO Realty Growth, INC (CTO) – 9,53%
3. Kite Realty Group Trust (KRG) – 5,62%

To get to these numbers, you have to divide the total paid over the last 4 years by the average price. Note that this doesn’t mean consistency of payment. Some of these companies have made a big payment on a specific year only to increase the average.

The companies below have shown consistency in dividends paid over time. Take a look:

1. Chevron Corporation (CVX)
   1.  4Y Avg Yield: 4,58%
   2. Payout Ratio: 32,37%
   3. Years of Growth: 40
2. Caterpillar INC (CAT)
   1. 4Y Avg Yield: 2,48%
   2. Payout Ratio: 36,38%
   3. Years of Growth: 29
3. Principal Financial Group INC (PFG)
   1. 4Y Avg Yield: 4,16%
   2. Payout Ratio: 37,54%
   3. Years of Growth: 13

You may think that 4,58% (Chevron) may be too small for you to retire. What are you going to do with a company that paid an average of 4,58%, right? Wrong. Take a look at that “40 years of growth”. If we go back 40 years (1982), the CVX stock was valued at ~$9.

According to my calculus using this data, the accumulated inflation from 1982 to 2022 was about ~2,96. The CVX stock today is valued at $186. If you bought CVX 40 years ago and held it, you would have gotten something close to 5% per year of REAL return (over inflation) and 8% a year of nominal return. Very low, right? Wrong.

If you had reinvested any dividends that you received over these 40 years to buy more CVX, you’ll have ended up with at least 5x more than our simple example. This is where the magic of dividends takes place: Patience.

Growth stocks

Growth companies are different. They can pay dividends, but the main objective is to increase profits and cash flows above their peers to acquire a bigger market share. Instead of analyzing metrics related to dividends and price, growth stocks are more suitable for high average sales growth.

In this case, the board prefers to use the money to reinvest in its own expansion. If they do it well, then it will also be beneficial to the shareholders. They will not receive dividends, but their wealth will surely increase due to the stock price increase. If the company starts to improve its metric of sales, revenues, and cash flow, then the price will follow in the long run. It has been like this since the beginning of humankind.

Let’s take a look at the “Net Income 3Y growth” indicator of some companies:

1. Ford (F) – 78%
2. American International Group INC (AIG) – 97%
3. Albernale Corporation (ALB) – 40%

Be aware that this is just a single metric for a simple example, not enough to analyze if a company can be considered a “Growth” stock. Let’s take a look at Figure 2 for FORD (F) which shows the same as Figure 1.

Note that the dividends’ distribution wasn’t consistent over time. Why? There are many reasons: crisis, competitors, new investments, and expansion. During the period from 2007 to 2011, no dividends were paid. From 2012 to 2017, Ford started to pay dividends at an increased rate until 2017. Then, the amount has considerably reduced. To know what is really going on we’d need to take a look at Ford’s financial statement and business plan.

Even without regular dividend payments, Ford has managed to deliver consistent revenue growth and a recurrent profit as shown in Figure 3.

Quantitative stocks

The Quant stocks don’t have to be related to anything other than Technical Analysis. It’s possible to have a Quant stock that is also a Dividend stock and a Growth stock at the same time, but the TA indicators are the main drivers here.

Each analyst can have their own price strategy setup to define whether a stock can be a good Quant stock or not. Figure 4 shows a simple example of AAPL using EMA (20,50,100,200).

From April 2020 to March 2021, the EMA 20 was higher than EMA 50. During this period, the price increased by about 92%. Another increase of 17% can be seen in a similar situation (July to November 2021).

Before you say: “Hey. I’ll use this and I’ll be rich. I’ll buy every time EMA 20 is higher than EMA 50 and then I’ll sell.” Be aware that if this was as simple as this, everyone would be a millionaire. Technical Analysis uses several indicators and advanced techniques in order to make a move. This is just a simple example.

Value stocks

Value stocks can be easily misunderstood with Growth stocks, but they are different. Value stocks represent a stock that is being traded at a lower price in relation to its fundamentals which can be anything (cash flow, revenue, dividends).

If a Growth stock is considered expensive, then it will not be a Value stock. But if it’s trading below its past metrics and future expectations, then it can be. Where the value comes from? There isn’t a clear answer to it. It will depend from investor to investor.

In order to analyze if the price is undervalued, investors commonly compare the company’s fundamentals with other peers and also its own track history. A clear example of a Value stock is Eni S.o.A. (E), an Italian multinational energy company.

The company is trading much below its P/CF ratio (which means that even though the cash flow has advanced, the price didn’t follow) and also its P/B ratio (the company is traded below the value of its net worth).

Conclusion

There are many types of stocks in the stock market. If the investor is aiming to generate income, maybe a preferred stock can be suitable. If the investor is aiming to take part in the long-term success of a company, then the common stocks can be a better call. If a company wants to take over another company or have an important role in deciding its future, then it will only make sense to acquire stocks with voting rights.