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Most “Preferred
Dividends” Are Actually Interest
With the dividend tax rate
cut to 15%, many
investors are seeking out preferred stock as a predictable source
of dividend income. Investors need to be wary, however, because
most preferred shares are not true preferred stock; they are
trusts, and instead of paying dividends, they pay interest, which
is taxed at ordinary income rates.
According to a
source quoted in an August 19, 2003, Wall Street Journal
article, the value of all preferred shares currently traded is
about $250 billion, but approximately $211 billion of that is
trust preferreds.
Trust
preferreds are created when companies issue debentures to grantor
trusts, which in turn sell preferred securities to investors. In
the past, trust preferreds were hybrid securities: issuers treated
them as debt for tax purposes and as equity for capital and
accounting purposes. However, new accounting rules issued in May
require companies to classify trust preferred securities as debt
for all purposes. Since there is no longer any financial
reporting advantage in the “trust preferred” label, many issuers
may seek to refinance this debt at lower rates.
QuantumOnline.com, a web
site devoted to preferred stock, offers a list of true preferred
stock. This list, entitled “Tax Advantaged Dividend Preferreds
Table,” is available under "stock lists".
| This article and
other articles are provided
for information purposes only.
They are not intended to be an offer to engage in any
securities transactions or to provide specific financial,
legal or tax advice. Articles may have been rendered partly
inaccurate by events that have occurred since publication.
Investors should consult their advisers before acting on any
topics discussed herein.
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