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A Hybrid of Equity and Debt: Preferreds

Destra Capital

June 27, 2019

Preferreds are hybrid securities that blend unique characteristics of both stocks and bonds.

This hybrid structure was first introduced in the U.S. by the State of Maryland in 1836 as a solution to fund their local railroad and canal companies. Over time, this structure has evolved and today is a unique hybrid that blends the following unique characteristics.

Read More About How Preferreds Got Their Start

Bond Characteristics of Preferreds

  • Preferreds are senior in the capital structure to common stock (in the event of financial distress or liquidation) and typically are paid dividends before common stocks
  • Preferreds are often rated by the credit agencies based on the issuer's credit overall quality, which plays an important role in their pricing
  • Preferreds are typically issued at a fixed par value of either $25 or $1,000
  • Preferreds regularly pay dividends that can be fixed or adjustable rate, and generally are paid monthly, quarterly or semi-annually

Equities Characteristics of Preferreds

  • Preferreds represent equity ownership in a company and are subordinate in a company’s capital structure to debt
  • Dividends are paid generally before any common dividends
  • Dividend yields are typically higher than common stocks, and in many cases bonds, and may be taxed at favorable dividend tax rates

The combination of these characteristics may be an excellent diversifier for investors seeking current income potential.

In our next discussion of preferreds, we will be covering the historically high yields of this unique asset class.

Capital Structure Seniority
Preferred Stock
Common Stock