What Is Zero-Dividend Preferred Stock?
A zero-dividend preferred stockis a preferred share issued by a company that is not required to pay a dividend to its holder. The owner of a zero-dividend preferred share will earn income from capital appreciation and may receive a one-time payment at the end of the investment term.
Key Takeaways
- Zero-dividend preferred stock is preferred stock that does not pay out a dividend.
- Common stock is still subordinate to zero-dividend preferred stock.
- Zero-dividend preferred stock earns income from capital appreciation and may offer a one-time lump sum payment at the end of the investment term.
- Issuers benefit from zero-dividend preferred stock as it allows them to raise capital, holds no voting rights, and pays no dividend.
- There are a few advantages and disadvantages of zero-dividend preferred stock for investors.
Understanding Zero-Dividend Preferred Stock
When a company issues stock, they issue two types: preferred stock and common stock. Preferred stock has priority over common stock when it comes to dividends and asset distribution and is therefore seen as less risky. Preferred stock usually does not have voting rights, whereas common stock does.
Owners of zero-dividend preference shares will not receive a normal dividend but they will still maintain reimbursement priority over common shareholders in the event of a bankruptcy. In such an event, they will get a fixed sum that was agreed upon in advance.
Zero-dividend preferred stock is comparable in some ways to zero-coupon bonds, though they are regarded as lower tier than bonds. Still, they do have upper-tier preference compared with common shareholders if a bankruptcy occurs. This type of stock is usually backed by the issuer’s assets and can be part of split capital investment trusts as a sort of share to produce fixed capital growth in a defined period.
Why Zero-Dividend Preferred Stock Is Issued
Companies that are likely to issue zero-dividend preferred stock include investment trusts, particularly those that may face challenges getting long-term debt approved. Zero-dividend preferred stock usually comes with a specific time period.
Issuing zero-dividend preferred stock is a way for an investment trust to raise capital that is easier than seeking a loan from a bank, and oftentimes lasts much longer than a bank would typically be willing to lend for. Zero-dividend preferred stock also comes with fewer restrictions than a bank would include in a loan. A zero-dividend preferred stock raises capital, holds no voting rights, and doesn't pay out a dividend. It's an extremely attractive option for a company to issue.
Advantages and Disadvantages of Zero-Dividend Preferred Stock
There are many advantages and disadvantages for an investor that come with a zero-dividend preferred stock.
Disadvantages
- Zero-dividend preferred stocks are vulnerable to increasing inflation, just as bonds are.
- The fluctuations of the market could see this type of stock be outperformed if the market rises.
- There is also no guarantee on its yields and the underlying assets could erode in value if the market goes through a downturn.
Advantages:
- The lack of taxes that would normally be warranted on dividends. Also, the lump sum payout would be taxed as a capital gain as opposed to net income, which would be at a lower rate.
- There is an expectation of a predetermined return within the window of time set for the stock.
- These shares are also predominantly less volatile when compared with equities.
FAQs
Zero-dividend preferred stock benefits issuers since it allows businesses to obtain cash, has no voting rights, and pays no dividends. Zero-dividend preferred stock is comparable to zero-coupon bonds in certain ways. However, they are regarded as being of a lesser tier than bonds.
What are the disadvantages of zero dividend policy? ›
Disadvantages. Zero-dividend preferred stocks are vulnerable to increasing inflation, just as bonds are. The fluctuations of the market could see this type of stock be outperformed if the market rises.
What are the cons of preferred stock? ›
Preferred stock confers no voting rights. So when it comes time for a company to elect a board of directors or vote on any form of corporate policy, preferred shareholders have no voice about the future of the company.
Is preferred stock a good investment? ›
As with all investments, the answer depends on your risk tolerance and investment goals. Preferred stock works well for those who want higher yields than bonds and the potential for more dividends compared to common shares. In short, preferred stock is riskier than bonds, but safer than common stock.
Is 0 dividend yield good? ›
In general, dividend stocks with 0% yield are a warning sign that a company is facing adverse economic conditions or financial hardships. Although companies do not have to pay dividends, those that have already committed to doing so could face investor backlash in the event they fail to pay out profits.
What is a zero dividend preference share? ›
Zero dividend preference shares (ZDPs) are a niche yet overlooked form of investment that can offer fixed and relatively low risk returns. ZDPs are issued by split capital investment trusts, which are similar to other investment companies in that they own and manage a portfolio of investments.
What is zero dividend payout policy? ›
Under the no-dividend policy, the company doesn't distribute dividends to shareholders. It is because any profits earned are retained and reinvested into the business for future growth.
Why do companies not like preferred stock? ›
Preferred stock dividend payments are not tax deductible to the issuing corporation. This makes issuing preferred stocks much more expensive for a company than issuing bonds. Most companies with solid credit ratings don't issue preferred stocks.
What are the best preferred stocks to buy now? ›
7 Best Preferred Stock ETFs to Invest in Right Now
| Preferred Stock ETF | Dividend Yield* | Expense Ratio |
|---|
| Global X U.S. Preferred ETF (PFFD) | 6.3% | 0.23% |
| iShares Preferred and Income Securities ETF (PFF) | 6.5% | 0.46% |
| First Trust Preferred Securities and Income ETF (FPE) | 5.9% | 0.84% |
| Invesco Preferred ETF (PGF) | 5.5% | 0.56% |
3 more rowsMar 26, 2024
Common stock has higher long-term growth potential than preferred stock but also has lower priority for dividends and a payout in the event of a liquidation. Lenders, suppliers and preferred shareholders are all in line for a payout ahead of common stockholders.
Preferred stocks are particularly attractive investments after major dislocations such as the great financial crisis or the Pandemic. This occurs because the asset class usually becomes oversold with most securities trading well below par value.
Who usually gets preferred stock? ›
Preferred stock is primarily issued to investors (venture capitalists, angel investors, PE firms) when they finance funding rounds. It is considered less risky than common stock since preferred stockholders get priority on company assets over common stockholders.
Who benefits from preferred stock? ›
Typical Buyers of Preferred Stock
Institutions are usually the most common purchasers of preferred stock, especially during the primary distribution phase. This is due to certain tax advantages that are available to them but that are not available to individual investors.
Which stock gives the highest dividend in the world? ›
World's companies with the highest dividend yields
| Symbol | Exchange | Div yield % TTM |
|---|
| TAPARIA D | BSE | 580.55% |
| MMLMGL D | EURONEXT | 462.50% |
| VITRO/A D | BMV | 12.73% |
| 88031 D | HKEX | 13.64% |
27 more rowsRealty Income Dividend Information
Realty Income has an annual dividend of $3.16 per share, with a yield of 5.08%. The dividend is paid every month and the last ex-dividend date was Sep 3, 2024.
Is no dividend good? ›
Investing in Stocks without Dividends
Companies that don't pay dividends on stocks are typically reinvesting the money that might otherwise go to dividend payments into the expansion and overall growth of the company. This means that, over time, their share prices are likely to appreciate in value.
What is the disadvantage of not paying dividend? ›
Disadvantage: Not paying dividends to its investors might induce some investors to loosen their confidence in the company. Not being able to pay dividends regularly might give investors a wrong or red signal not to invest their money in that particular company.
What are the disadvantages of the dividend policy? ›
The primary drawback of the stable dividend policy is that investors may not see a dividend increase in boom years. Under the constant dividend policy, a company pays a percentage of its earnings as dividends every year. In this way, investors experience the full volatility of company earnings.
What are the cons of dividend reinvestment? ›
Disadvantages of dividend reinvestment
- May require minimums. ...
- Plans may vary. ...
- DRIPs invest only in their own stock. ...
- Inflexible reinvestment schedule. ...
- May lead to an unbalanced portfolio. ...
- Still must pay taxes on dividends.
Disadvantages of zero-coupon bonds
Usually, the price of zero-coupon bonds falls as the interest rate increases. These price swings can make these bonds less cost-effective when you sell them early.
