Taxable Preferred Securities

DEFINITION of 'Taxable Preferred Securities '

A type of preferred equity security that does not qualify for the dividends-received deduction for corporations of typical preferred securities, defined in Section 243 of the Internal Revenue Service (IRS) Code. Taxable preferred securities are usually junior level liabilities, and the coupons tied to them can either be fixed or variable, and for indefinite or specific maturities.

As with regular preferred stocks, these securities trade like bonds with regular denominations of $25 par and $1,000 par. The dividends paid are treated as regular income instead of dividends to the investor, but receive favorable tax treatment for the issuing company.

Also known as "hybrid preferred securities".

BREAKING DOWN 'Taxable Preferred Securities '

The tax treatment of these securities is more favorable for corporations and less for investors, causing them to typically trade at higher yield spreads than regular preferreds. This type of security started to take off in the mid-1990s. Their proliferation has led to several funds and exchange-traded funds that invest solely in taxable preferreds.

The $25 par securities are usually bought and sold by retail investors, whereas institutional investors primarily deal in the $1,000 par securities.