What Is Zero-Dividend Preferred Stock?

Zero-dividend preferred stock is a type of preferred share that a company issues without paying its holders a dividend. After the investment period, the owner of a zero-dividend preferred share may receive a one-time payment and income from capital appreciation.

Understanding Preferred Stock with No Dividend

Preferred stock and ordinary stock are the two forms of stock that companies issue. Preferred stock is seen as less hazardous as it takes precedence over regular stock in terms of dividends and asset distribution. Unlike common stock, preferred stock often does not have voting rights. 1.

Zero-dividend preference shareowners will not get a regular dividend. However, in the case of bankruptcy, they will still be entitled to payment before common shareholders.1. They will get a predetermined, set amount in such a case.

Bonds and zero-dividend preferred stocks are similar in several aspects, although preferred stocks are often considered higher-tier. However, they have a higher preference than regular shareholders in the event of insolvency. This kind of stock may be included in split capital investment trusts as a kind of share to provide fixed capital growth within a specific time frame. The issuer’s assets often back it.

Why Preferred Stock With No Dividend Is Issued

Investment trusts are among the most likely to issue zero-dividend preferred shares, especially if they are having trouble obtaining authorization for long-term financing. Preferred stock with no dividends often has a time limit.

An investment trust may obtain money more efficiently and for far more extended periods than a bank would typically be ready to lend by issuing zero-dividend preferred shares. Additionally, fewer constraints are attached to zero-dividend preferred shares than a bank loan. In addition to raising money, zero-dividend preferred stocks have no voting rights and don’t pay dividends. It’s an alluring alternative that a business may provide.

Benefits and Drawbacks of Preferred Stock with No Dividend

A zero-dividend preferred stock has several benefits and drawbacks for the investor.

The drawbacks

• Just like bonds, zero-dividend preferred stocks are susceptible to rising inflation.
• There is no guarantee on its yields, and the value of the underlying assets may decline if the market experiences a downturn.
• Market fluctuations may cause this type of stock to outperform if the market rises.

Benefits include

• profits don’t have to pay taxes, which is usually the case. Also, the one-time payment would be taxed as a capital gain instead of net income, which means it would be taxed at a lower rate.
• An inevitable return is expected within the stock’s limited time frame.
• Not only that, but these shares tend to be less unpredictable than stocks.

Conclusion

• Preferred stock that does not pay dividends is known as zero-dividend preferred stock. Common stock still has precedence over zero-dividend preferred stock.
• Preferred stock with no dividends generates income through capital growth and might pay out a lump-sum payment all at once when the investment term expires.
• Zero-dividend preferred stock is advantageous to issuers because it enables them to raise capital, has no voting rights, and does not yield dividends.
• Investors should weigh the benefits and drawbacks of zero-dividend preferred stock.