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PREFERRED STOCKS - There are four preferred families; Foreign, Partnerships, Perpetuals and REITS which are equities, not bonds or quasi bonds. They pay dividends, usually have no maturity date, trade on a major stock exchange, and stand below debt but above preference and common stock in the issuers pay chain.

  • Foreign
    • - This "Family" of preferred securities is issued by foreign-based companies in US dollars. There are several types of securities in this "family". They are often issued as American Depository Receipts (ADR). ADR's are also called American Depository Shares (ADS). Be careful when buying these preferreds, some of the issues are subject to foreign withholding taxes. Dividends are generally subject to the new dividend tax rate.
  • Partnership
    • - This "Family" of preferred security is issued by a Partnership. There are a variety of partnership structures, however the most common are; Limited Liability Companies (LLC) and Limited Partnerships (LP). In most cases a parent company establishes and becomes the general partner of these entities. These issues are almost identical to Trust Preferreds, but Investors receive an IRS Schedule K-1 rather that Form 1099. The K-1 is usually sent out much later than 1099s and since it could add pages to a tax return the preparation fee will go up.
  • Perpetual
    • - This "Family" of security is senior to common equity but junior to all debt. Perpetual preferreds usually have a fixed cumulative dividend and have no maturity, like common stock. Most are callable some time in the future and are DRD (Dividend Received Deduction) eligible for corporation or qualifying investors. For individuals the dividends are subject to the new dividend tax rate.
  • REIT
    • - (Real Estate Investment Trust) This "Family" of preferreds is issued by a special purpose corporation or trust that raises capital from investors to acquire or provide financing for all forms of income-producing real estate. REIT's typically pay high dividends on their common stock because they are required to pay out 95% of their earnings in order to keep those earnings from being taxed. The common stock dividend, of course, changes with the REIT's earnings. Investors buy a REIT's preferred because it usually pays a higher dividend than the common stock and is a fixed rate no matter what the earnings. Some of the preferreds have a clause, which requires the REIT to pay the higher of, the fixed minimum dividend or the common stock dividend. All dividends are taxed at the ordinary income tax rate.