What Are Preferred Redeemable Increased Dividend Equity Securities (PRIDES)?

Preferred Redeemable Increased Dividend Equity Securities, or PRIDES, are synthetic securities consisting of a forward contract to purchase the issuer's underlying security and an interest-bearing deposit for a specific price. Interest payments are made at regular intervals, and conversion into the underlying security is mandatory at maturity. PRIDES were first introduced by Merrill Lynch & Co.

Key Takeaways

  • Preferred Redeemable Increased Dividend Equity Securities (PRIDES) are synthetic securities consisting of a forward contract to purchase the issuer's underlying security and an interest-bearing deposit for a specific price.
  • PRIDES were first introduced by Merrill Lynch & Co.
  • They are similar to mandatory convertible securities in that the preferred share must be converted into common stock by a certain date.
  • PRIDES allow investors to earn stable cash flows while still participating in the capital gains of an underlying stock.
  • PRIDES are considered a preferred stock because they have priority over common stock and carry rights beyond those of common stock.

Understanding Preferred Redeemable Increased Dividend Equity Security (PRIDES)

PRIDES are similar to mandatory convertible securities but have a different structure. They are similar in that the preferred share must be converted into common stock by a certain date. A publicly traded company issues convertible securities when it needs to raise capital by issuing stock, but doing so would potentially put a strain on the price of current shares.

PRIDES allow investors to earn stable cash flows while still participating in the capital gains of an underlying stock. This is possible because these products are valued along the same lines as the underlying security. 

Though there are differences in mandatory convertibles and their underlying structures, there are common features of which PRIDES also share:

  1. The mandatory conversion to equity once the convertible matures.
  2. An appreciation cap or limit, as opposed to common stock.
  3. The dividend yield is typically higher than that of common stock. Additionally, many mandatory convertible securities have tax advantages.

PRIDES are considered a preferred stock because they have priority over common stock and carry rights beyond those of common stock. For example, owners of preferred shares may have an advantage should a company file bankruptcy or liquidate.

Preferred stocks can be issued by a company of any size, and they have characteristics of both equity and debt. Holders of PRIDES do not have voting rights, whereas holders of common stock generally vote on many issues. However, holders of PRIDES often receive a considerably higher dividend than common shareholders, which is a significant advantage.