Friday, January 2, 2009

More Comments: Preferred stock dividends, deferral rights, and taxation of income not received

For those interested in buying a preferred stock, what do you have exactly other than the right to receive a dividend, hopefully with some meaningful preference rights compared to the common shareholder as to payments of dividends? If it is easy to take that dividend away, what do you have then when the dividend is non-cumulative? What do you have even when it is cumulative other than a tax liability for income not received? I have never been caught yet holding a preferred stock where the dividend was deferred. I would expect a massive drop in the price of such an issue immediately after the announcement even when the dividend is cumulative, as shown by the price action in MPGPRA recently. MPG-PA: Summary for MAGUIRE PPTYS PFD A - Yahoo! Finance I have never owned that one and do not plan to buy it at $1. If I ever made a decision to buy a cumulative preferred stock that has deferred a dividend, or a junior bond that has deferred a cumulative interest payment, it would have to be an extraordinary situation and I would most probably wait months after the deferral decision to make a decision. I would be monitoring the likely survivability of the company. Remember, the dividend is still accumulating even though it has not been paid for a cumulative preferred issue like MPGPA. Given the tax consequences, I would only do an add in the retirement account so I would not have to pay income taxes on dividends that have not been received. This kind of buy would be pure speculation so I would not risk much. I am just using MPGPA as an example to illustrate a point. I would not buy it in a taxable account and I would not risk much for such a dicey situation in a retirement account. So at most I might risk 50 to $100 in a retirement account, when the odds improve that the company will survive outside bankruptcy. As I said in the last post, when the common stock dividend is gone, each investor needs to pay heightened attention to the deferral issue with a preferred stock, and it does not matter whether you call it a Trust Preferred or a regular preferred. You are at an increased risk of having a deferral. Why did the company have to eliminate the common dividend after all? It could only be because of a need to preserve capital for one reason or the other, and none of those reasons are good ones.

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