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 are the advantages and disadvantages of preference shares?

    Learn about the advantages and disadvantages of preference shares to both investors and issuing companies, including the ... Read Answer >>
  4. 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 >>
  5. How does preferred stock differ from company issued bonds?

    Discover the primary differences between preferred stock and corporate bonds, two income-generating investment vehicles issued ... Read Answer >>
  6. What are the different types of preference shares?

    Learn about the difference between the four types of preference shares – callable, cumulative, convertible and participatory ... 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

    What are Preference Shares?

    Preference shares, also referred to as preferred shares, are equity shares that give the shareholders certain rights ahead of common shareholders. For instance, when the corporation declares ...
  4. 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.
  5. 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.
  6. Investing

    Valuation Of A Preferred Stock

    Determining the value of a preferred stock is important for your portfolio. Learn how it's done.
  7. 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.
  8. Managing Wealth

    What is Convertible Preferred Stock?

    Convertible preferred stock is preferred stock that can be converted into common stock as of a predetermined date at a specified ratio.
  9. 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.
  10. Managing Wealth

    The Different Between Preferred and Common Stock

    Preferred and common stocks are different in two key ways.
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. Preferred Stock ETF

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

    Preferred stock that includes an option for the holder to convert ...
  5. Preferred Dividend

    A dividend that is accrued and paid on a company's preferred ...
  6. Participating Preferred Stock

    A type of preferred stock that gives the holder the right to ...
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center