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. Why would a company issue preference shares instead of common shares?

    Learn about some reasons that corporations might issue preference shares and why investors might value them more than common ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
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

    The Advantages of Preferred Dividends

    Preferred dividends are cash distributions a company pays on its preferred shares.
  3. Investing

    Valuation Of A Preferred Stock

    Determining the value of a preferred stock is important for your portfolio. Learn how it's done.
  4. 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.
  5. Managing Wealth

    The Different Between Preferred and Common Stock

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

    Top 6 Preferred Stock ETFs

    A list of top ETFs which invest in preferred stocks and pay regular dividend income
  7. 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.
  8. Investing

    Introduction To Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  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. Managing Wealth

    Taking The Bite Out Of A Bear Market

    Find out which financial instruments will protect you from bear market volatility.
RELATED TERMS
  1. Preference Shares

    Company stock with dividends that are paid to shareholders before ...
  2. Preferred Stock ETF

    An exchange-traded fund that either tracks a preferred stock ...
  3. Convertible Preferred Stock

    Preferred stock that includes an option for the holder to convert ...
  4. Noncumulative

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

    A preferred, floating rate issue, whose interest rate is tied ...
  6. Current Dividend Preference

    A safety feature of preferred shares, whereby holders of such ...
Hot Definitions
  1. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  2. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  3. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the ...
  5. Border Adjustment Tax

    A tax levied on goods based on where they are sold – exported goods are exempt from tax; those imported and sold in the ...
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center