Investments, tenth edition

  Preferred Stock 

    Preferred  stock    has features similar to both equity and debt. Like a bond, it promises 

to pay to its holder a fixed amount of income each year. In this sense preferred stock 

is similar to an infinite-maturity bond, that is, a perpetuity. It also resembles a bond in 

that it does not convey voting power regarding the management of the firm. Preferred 

stock is an equity investment, however. The firm retains discretion to make the dividend 

payments to the preferred stockholders; it has no contractual obligation to pay those 

dividends. Instead, preferred dividends are usually  cumulative;  that is, unpaid dividends 

cumulate and must be paid in full before any dividends may be paid to holders of com-

mon stock. In contrast, the firm does have a contractual obligation to make the interest 

payments on the debt. Failure to make these payments sets off corporate bankruptcy 

proceedings. 

 

Preferred stock also differs from bonds in terms of its tax treatment for the firm. 

Because preferred stock payments are treated as dividends rather than interest, they are 

not tax-deductible expenses for the firm. This disadvantage is somewhat offset by the fact 

that corporations may exclude 70% of dividends received from domestic corporations in 

the computation of their taxable income. Preferred stocks therefore make desirable fixed- 

income investments for some corporations. 

 Even though preferred stock ranks after bonds in terms of the priority of its claims 

to the assets of the firm in the event of corporate bankruptcy, preferred stock often 

sells at lower yields than do corporate bonds. Presumably, this reflects the value of the 

dividend exclusion, because the higher risk of preferred would tend to result in higher 

yields than those offered by bonds. Individual investors, who cannot use the 70% tax 

Game Stop CI A 

GME 

16.74 

0.17 

1,584,470 

26.66 

16.36 

0.60 

3.58        6.80 

230.63

Gannett GCI 

14.65 

20.04  4,277,615 

16.26 

8.28 

0.80 

5.46        8.07 

9.57

Gap 

GPS 

28.47 

0.50 

5,952,210 

29.23 

15.08 

0.50 

1.76      16.88 

53.48

Gardner Denver 

GDI 

48.30 

0.08 

797,258 

92.93 

45.54 

0.20 

0.41        9.01 

237.32

Gartner IT 

45.71 

20.14 580,056 

46.69 

31.98 .... 

....       30.98 

31.46

GasLog GLOG 

10.24 

0.08 

126,666 

13.34 

8.76 

 

 

 

....           ....  217.49

GATX 

GMT 

38.76 

0.27 

226,825 

45.50 

28.90 

1.20 

3.10      15.19 

211.22

Gaylord Entertainment 

GET 

37.78 

0.44 

273,954 

40.37 

17.39 

.... 

....    105.03 

56.50

Gazit-Globe GZT 

9.30 

20.11 

2,152 

11.07 

8.41 

0.43 

4.61          .... 

21.59

GenCorp GY 

6.69 

20.01 321,785 

7.27 

3.74 .... 

....      93.96 

25.75

Genco Shipping&Trading 

GNK 

2.79 

0.04 

355,441 

10.14 

2.72 

.... 

....       ....dd  258.73

Generac Holdings 

GNRC 

22.21 

20.14 169,519 

30.61 

15.41 .... 

....        4.36  220.76

General Cable 

BGC 

26.80 

0.47 

322,159 

45.20 

20.21 

.... 

....      19.43 7.16

General Dynamics 

GD 

64.69 

0.65 

1,359,120 

74.54 

53.95 

2.04 

3.15        9.31 

22.59

General Electric 

GE 

19.72 

0.13  45,307,178 

21.00 

14.02 

0.68 

3.45      16.01 

10.11