US Preferred Securities: Unique Characteristics from a Bramshill Perspective

Brittney Van Calcar News

Published by: Advisor Perspectives

Written by Team of Bramshill Investments, 10/29/2019

With interest rates around the world at or approaching all time lows, income investors have an obvious motivation to look beyond their customary areas of market concentration.  From its perspective as an unconstrained income investor, Bramshill believes that the U.S. market in preferred securities is quite compelling compared to most alternatives.

Preferred securities have greatly evolved in recent years.  From their early origins in this country as a vehicle used primarily to finance growth in utilities, they evolved beginning in the 1980’s to be used primarily by financial firms that found them to be a useful tool for building a capital structure that met their regulatory environment, although they continued to be used by utilities, industrials, REIT’s, and other sectors of the economy.  Traditional preferreds were originally conceived as an intermediate form of capital that occupied a position in the capital structure between common stock and debt and received a fixed payment from after tax profits, which could be interrupted only if dividends to common shares were discontinued (but without forcing a default as would be the case for an interruption in debt service).  Because dividends on many of these securities are paid from after tax profits, both individuals and certain corporate owners may be allowed to deduct 70% of the income from their income tax, the “Dividend Received Deduction” or DRD. 

More recently, a variety of newer structures have been offered which are more nearly like debt than the traditional preferred shares, though they usually are exchange listed and trade in a manner similar to traditional preferreds…

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