A:

There is no direct tax advantage to the issuing of preferred shares when compared to other forms of financing such as common shares or debt. The reason for this is that preferred shares, which are a form of equity, are paid fixed dividends with after-tax dollars. This is the same case for common shares. If dividends are paid out, it is in after-tax dollars.

Preferred shares are considered to be like debt in that they pay a fixed rate like a bond (a debt investment). It is because interest expenses on bonds are tax deductible, while preferred shares pay with after-tax dollars, that preferred shares are considered a more expensive means of financing. Issuing preferred shares does have its benefits over bonds in that a company can stop making payments on preferred shares where they are unable to stop making payments on bonds without going into default.

There are a few reasons why issuing preferred shares are a benefit for companies. One benefit of issuing preferred shares, is that for financing purposes they do not reflect added debt on the company's financial books. This actually can save money for the company in the long run. When the company looks for debt financing in the future, it will receive a lower rate since it will appear the company's debt load is lower - causing the company to in turn pay less on future debt. Preferred shares also tend to not have voting rights, so another benefit becomes that issuing preferred shares does not dilute the voting rights of the company's common shares.

For more information on preferred shares, see Introduction To Convertible Preferred Shares.

RELATED FAQS
  1. What are preferred shares?

    Understand what preferred shares are. Learn about both the benefits and the drawbacks of preferred shares, which effects ... Read Answer >>
  2. What is the difference between preference and ordinary shares?

    Learn about the main differences between preference and ordinary shares including how dividends are paid for both types of ... Read Answer >>
  3. What are some examples of preferred stock, and why do companies issue it?

    Understand the difference between preferred stock and common stock, and learn the primary reasons why companies issue preferred ... Read Answer >>
  4. 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 >>
  5. What is the difference between preferred stock and common stock?

    Preferred and common stocks are different in two key aspects. First, preferred stockholders have a greater claim to a company's ... Read Answer >>
Related Articles
  1. Investing

    A Primer On Preferred Stocks

    Offering both income and relative security, these uncommon shares may work for you.
  2. Managing Wealth

    What You Need To Know About Preferred Stock

    Curious about preferred shares? Here's what you should know about these bond-like instruments.
  3. Investing

    Preferred Stocks versus Bonds: How to Choose

    What is the difference between corporate bonds and preferred stock? The following are a list of pros and cons for each investment.
  4. Investing

    Prefer Dividends? Why Not Look At Preferred Stock?

    Preferred stock is an under-used option for income-seeking investors.
  5. 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.
  6. Investing

    The True Risks Behind Preferred Stock ETFs (PFF, FPE)

    Consider the risks of investing in preferred stocks, including lack of diversification and sector risks in preferred stock ETFs.
  7. Managing Wealth

    The Different Between Preferred and Common Stock

    Preferred and common stocks are different in two key ways.
  8. 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.
  9. Investing

    PFF vs. PGX: Which Preferred Stock ETF is Better?

    Get a review and analysis of the two most popular preferred stock ETFs for investors looking for yield to consider adding to their portfolio.
  10. Investing

    Introduction to Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
RELATED TERMS
  1. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  2. Preference Shares

    Company stock with dividends that are paid to shareholders before ...
  3. Participating Preferred Stock

    A type of preferred stock that gives the holder the right to ...
  4. Noncumulative

    A type of preferred stock that does not pay the holder any unpaid ...
  5. Adjustable-Rate Preferred Stock - ARPS

    A type of preferred stock where the dividends issued will vary ...
  6. Current Dividend Preference

    A safety feature of preferred shares, whereby holders of such ...
Hot Definitions
  1. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  2. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  3. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  4. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  5. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  6. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
Trading Center