Zero-dividend preferred stock

Zero-dividend preferred stock 

Zero dividend preferred stocks are typically issued by larger, well-established companies with a strong track record of profitability. This makes them a relatively safe investment, although there is always some element of risk involved in any stock purchase. Zero-dividend preferred stocks can be bought and sold on major exchanges, and they usually trade at a premium to common stocks. 

If you are considering investing in zero-dividend preferred stocks, it is important to research and consult a financial advisor to ensure that they are a good fit for your investment goals. 

What is zero-dividend preferred stock? 

A zero-dividend preferred stock does not have to pay dividends to its shareholders. A preferred shareholder who receives no dividends obtains income through capital gain and may receive a one-time payout at the end of the investment period. 

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. However, in the case of bankruptcy, they would have precedence over ordinary investors. This stock can be used in split capital investment trusts to generate fixed capital growth over a defined period because the issuer’s assets often back it. 

Understanding zero-dividend preferred stock 

When a corporation issues stock, it divides it into common and preferred stock categories. Preferred stock is seen as less risky since it receives asset distribution rights and dividends before common stock. In contrast to common stock, the preferred stock often does not have voting rights. 

Zero-dividend preferred stocks (ZDPs) are equity security types that do not pay dividends to shareholders. Instead, zero-dividend preferred stocks are structured so that the majority of the company’s profits are reinvested back into the business. This can be attractive to investors looking for long-term growth potential, as the reinvestment of profits can help fuel the company’s expansion. 

Advantage of zero-dividend preferred stock 

A zero-dividend preferred stock has a variety of benefits for investors: 

  • The lack of ordinary dividend taxes. Furthermore, the lump sum payment will be taxed as capital appreciation rather than net income, which is taxed at a lower rate. 
  • A predefined return is expected within the time frame established for the stock. 
  • These stocks are also less volatile than equities. 

Disadvantages of zero-dividend preferred stock 

Zero-dividend preferred stock also has drawbacks for investors: 

  • Like bonds, zero-dividend preferred shares are vulnerable to increasing inflation. 
  • Further, the returns are not assured, as well as the underlying assets might lose value during a market collapse. 

Why is zero-dividend preferred stock issued? 

Issuing zero-dividend preferred shares allows an investment trust to obtain funds in a method that is less difficult than requesting a loan from a bank, and is often for considerably longer than a bank would generally be prepared to lend for.  

Zero-dividend preferred shares also have fewer limitations than a loan from a bank. A zero-dividend preferred share is used to raise cash, but it has no voting rights and does not pay dividends. It’s an appealing option for a corporation. 

Investment trusts, particularly ones that may have difficulty obtaining long-term finance, often issue zero-dividend preferred shares. A zero-dividend preferred stock is generally limited in time. 

Frequently Asked Questions

If a company owes dividends to preferred shareholders but fails to pay them, the unpaid amount appears on its books or records as dividends in arrears. When dividend payment deadlines are missed, the amount of arrears increases if the preferred shares are cumulative. 

 

There are a few reasons why preferred stock dividends are not tax-deductible.  

  • First, the Internal Revenue Service, or IRS, views them as a form of interest, and interest is not tax-deductible.  
  • Second, preferred stock dividends are paid out of a company’s earnings, and the IRS does not allow companies to deduct dividends paid to shareholders from their earnings.  
  • Finally, preferred stock dividends are usually paid in cash, and the IRS does not allow companies to deduct cash dividends paid to shareholders from their earnings. 

 

A zero-dividend preference shares list is a list of shares with no par value and is not entitled to any preference in terms of dividends or assets in the event of liquidation. 

These shares are typically issued by startups and small companies looking to raise capital without offering any preferential treatment to investors. While these shares may be less attractive to investors than other types, they can still be a valuable addition to a portfolio. 

 

Zero-dividend preferred stock (ZDP) is a type of preferred stock that does not pay dividends. The issuing company does not have to pay dividends on this type of stock, even if it is profitable.  

ZDP is often issued by companies in financial trouble and who cannot afford to pay dividends on their common stock. Although ZDP does not pay dividends, it may still have value if the company’s stock price increases. 

    Read the Latest Market Journal

    One Dollar at a Time: The Potential of Fractional Shares

    Published on May 20, 2024 27 

    Table of contents 1. Introduction 2. Dollar-Cost Averaging 3. Popularity of Dollar-Cost Averaging 4. Small...

    Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?

    Published on May 20, 2024 26 

    Imagine you are dining at a nice restaurant, feeling overwhelmed by the variety of seemingly...

    Weekly Updates 20/5/24 – 24/5/24

    Published on May 20, 2024 14 

    This weekly update is designed to help you stay informed and relate economic and company...

    What is CFD? With 2 Practical Examples

    Published on May 15, 2024 98 

    In this article, you will learn what CFD (Contract for Difference) is, the costs and...

    What is ESG investing, and why is it important?

    Published on May 15, 2024 75 

    Over the last five years, Environmental, Social, and Governance (ESG) investing has evolved from being...

    What are fixed-income funds?

    Published on May 15, 2024 49 

    In the diverse world of unit trusts, various funds employ distinct investment strategies aligned with...

    Hong Kong Value Stocks Q2 2024

    Published on May 14, 2024 117 

    After a long period of sluggishness, Hong Kong market has begun to pick up. The...

    Weekly Updates 13/5/24 – 17/5/24

    Published on May 13, 2024 44 

    This weekly update is designed to help you stay informed and relate economic and company...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com