S&P US Preferred Stock Primer

Standard & Poor’s published a Preferred Stock Primer dated 2009-3-25:

Preferred stock returns have low correlations with common stock returns, making them good diversifiers. They also have relatively low correlations with bonds, with expected volatility and returns between those of common stocks and bonds. This characteristic makes them a good complement to a bond portfolio.

Later on in the paper they cite a preferred/bond correlation of 0.309 and a preferred/common correlation of 0.491.

There are many types of preferreds and preferred trademark names. However, most preferreds are based on two main structural models: Traditional Preferreds and Trust Preferreds. Traditional Preferreds are closer to stocks and are generally REIT preferreds, foreign preference shares trading in the U.S. and straight preferred stocks issued by U.S. corporations.

Traditional preferreds are a senior form of equity which rank above common shares but below corporate debt in creditor standings. Dividends from traditional preferreds are taxed as capital gains. Trust Preferreds are closer to bonds and thus rank higher in general creditor standings than regular preferreds. Dividends from trust preferreds are taxed as ordinary income. As of February 27, 2009, the S&P Preferred Stock Index contained 35 trust preferreds out of a total 72 constituents.

Somwhate confusingly, they later state:

Some preferred stocks have qualified dividend distributions that are taxed in the same manner as qualified dividends of common stocks. Others have their dividends charged as interest income and are subject to higher tax rates. Those that do have qualified dividend distributions have holding period requirements that are higher than those for common stocks. Investors need to contact their tax advisors to assess their tax situation. The favorable tax treatment for some preferreds is a result of tax laws passed in 2003, and this may change in the future.

Figuring out the tax status of US preferreds sounds like a full-time job in itself!

The modern era for preferred stocks started in the early 1990s. Since then, the preferred stock market has grown rapidly, quadrupling in size by 2005 to $193 billion. Concerns about default and conversion risk shrunk the market to about $100 billion in early 2008. For a comparative perspective, the total size of the U.S. stock market was in the range of $9.5 trillion; and the U.S. corporate bond market was in the range of $4 trillion.

4 Responses to “S&P US Preferred Stock Primer”

  1. prefhound says:

    For taxable Canadian investors, I believe the tax status of any distribution from a US pref (as for US common) will be subject to withholding (15% by treaty if you fill in the forms) and taxed in Canada as income. For this reason, and based on your article, only the Trust Prefs are likely to be suitable for taxable Canadian investors (the US trust pref yields are likely higher than US straight pref yields due to US tax effects).

    For Canadian RRSP/RRIFs, I believe there is no withholding tax.

    When US securities of any kind yield more than about 2%, they are best held in an RRSP.

  2. Not sure this is the best place, but news out of the US that a company has suspended their preferred share dividends, see http://www.marketwatch.com/story/chesapeake-energy-shares-surge-8-on-news-to-suspend-preferred-stock-dividends-2016-01-22

  3. Not sure this is the best place, but news out of the US that a company has suspended their preferred share dividends, Google for Chesapeake Energy

  4. jiHymas says:


    Chesapeake Energy Corporation (NYSE:CHK) announced today that it has suspended payment of dividends on each series of its outstanding convertible preferred stock effective immediately.

    Doug Lawler, Chesapeake’s Chief Executive Officer, commented, “The board and management believe this decision is in the best long-term interest of all Company stakeholders. Today’s decision to suspend our preferred stock dividends will allow the company to retain approximately $170 million of additional cash per year and use these funds to purchase debt at significant discounts in the near term. Given the current commodity price environment for oil, natural gas and natural gas liquids, we believe that redirecting this cash toward debt retirement provides better returns for the Company. We currently have senior debt securities trading at significant discounts, and we will continue to take advantage of that within the coming year.”

    Suspension of the dividend does not constitute an event of default under the Company’s revolving credit facility or outstanding bond indentures.

    They say they have no plans to pursue bankruptcy but fears and rumours swirl:

    Shares in Chesapeake Energy CHK -12.82% were halted in mid-morning trading after selling off more than 50% to new lows on a report from Debtwire that the company had hired restructuring specialists Kirkland & Ellis . Seeking to stem the panic, Chesapeake issued a statement saying it “has no plans to pursue bankruptcy” and that Kirkland & Ellis had been one the company’s law firms since 2010. Chesapeake also reportedly hired restructuring specialists Evercore Partners back in December. After trading resumed, shares recovered some of their ground, jumping from $1.50 to $2.25, though still off 27% on the day so far.

    At these levels, all of Chesapeake’s equity could be had for $1.4 billion. Shares traded above $30 in 2014, and north of $60 in 2008, when natural gas prices hit record highs.

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