The General Electric Company (NYSE: GE) is an original member of the Dow Jones Industrial Average (DJIA) and one of America’s most iconic manufacturing companies. The company was originally founded to promote electricity and the inventions of Thomas Edison. It is responsible for many inventions and products, such as refrigerators, electric stoves, jet engines and X-ray machines, things many people couldn’t imagine living without today.
General Electric is undergoing a reorganization designed to refocus the company on the research, development and manufacturing of high technology industrial products, as of 2016. As part of this reorganization, General Electric is selling or spinning off the majority of its GE Capital unit. This caused General Electric to make changes to its preferred stock that was connected to the GE Capital unit.
Old Preferred vs New Preferred
General Electric had three outstanding sets of preferred shares, Series A, Series B and Series C. The company announced on December 18, 2015, that it would be exchanging all the Series A, B, and C shares for a new Series D 5% fixed-to-floating rate noncumulative perpetual preferred stock. On January 20, 2016, General Electric announced that 95.8% of the old preferred series had been tendered in the exchange offer for Series D shares.
Breaking Down Series D
The new Series D preferred stock pays a set 5% dividend for the first five years. On January 21, 2021 the Series D shares become callable preferred stock and change to paying a floating rate dividend. The annual dividend will be set at 3.33% plus the three-month LIBOR rate. Based on the LIBOR rate for March 23, 2016, the dividend would be set at 0.62% +3.33% for a total rate of 3.95%. The actual dividend rate in 2021 will be different. The company has the right to redeem any and all Series D shares on any dividend payment date after January 21, 2021.
General Electric’s Series D preferred stock pays a dividend of 5% for five years, while the five-year U.S. Treasury note (T-note) has an interest payment of 1.38%. After the five-year period is over, the Series D preferred pays a minimum dividend of 3.3%, while a 30-year U.S. Treasury bond (T-bond) has an interest payment rate of 2.67%. If interest rates increase, the LIBOR addition to the minimum dividend will also increase, providing a hedge against inflation and interest rate risk that is not available from a U.S. T-bond.
There is a difference in tax treatment between interest payments and dividends. Interest payments are taxed fully as ordinary income, with a top tax rate of 39.6%, while dividends received preferential tax treatment and have a top tax rate of 20%.
Common vs. Preferred
General Electric’s common stock has a dividend yield of 2.96%. The company has a stated policy of returning capital received from the divestiture of GE Capital assets to shareholders in the form of stock buybacks or increased dividends. This will increase General Electric's share price and increase the dividend yield based on the initial amount invested. The common stock has a greater potential for total return over a 5- to 10-year period than the preferred stock. However, there is the chance of an economic event that will cause the common stock share price to drop, while the face value of the Series D will remain constant.
The main investors in General Electric’s Series D preferred are mutual funds and institutional investors looking for a steady income stream from a relatively safe investment. The Series D preferred is an excellent investment for investors actively managing their retirement savings accounts and looking for income streams that exceed the rate of inflation. The common stock is the better retirement plan investment for people not needing current income from their retirement accounts.