New Tax Law Bodes Well for Companies Issuing Preferred Stock

Sheaff Brock Preferred Income Portfolio | Impact of New Tax Law on Preferred Stock

New Tax Law Bodes Well for Companies Issuing Preferred Stock

There’s a whole lot of media buzz going on about the new tax law and how good a thing that law is turning out to be for corporate America. Turns out, certain features of the law may be a very good thing for investors in preferred stock as well. What’s that all about?

First, by way of quick review, preferreds are hybrid securities, blending traits of both stocks and bonds. Preferreds, like common stock, represent ownership in a company, but preferred shareholders have no voting privileges. Like bonds, preferreds are issued at a fixed part value and rated by independent credit agencies….

Well, what’s been true all along is that, for many preferred securities, the income is paid out as dividends rather than as income. Those preferred dividends are categorized as QDI (qualified dividend income). The new tax law does not change this at all. What is new?

  1. The QDI treatment could now be even more valuable for investors in states with high income tax rates (the new law limits the amount of state and local taxes that can be deducted from their investment income).
  2. The lower corporate tax might improve the earnings of preferred issuers, giving those companies higher credit ratings.
  3. The new tax law may increase the demand for high-income investments. Why? (This one’s a bit complicated, so follow the logic….) There are new limits placed on how much interest a business can write off. That might change the corporate structure to favor less debt and more equity.
  4. The new cap on state and local tax deduction might lead some municipalities to issue fewer municipal bonds. With a smaller supply of municipal and junk bonds, there could be more demand for the higher after-tax income from preferred stock.

The Sheaff Brock Preferred Income portfolio is an actively managed strategy with the primary objective being to seek income, Sheaff Brock Senior Portfolio Manager JR Humphreys, CFA, CAIA, explains. The portfolio is made up of 20-25 stocks of which are researched, analyzed, and selected on several different criteria including call date, credit rating, yield-to-call, and liquidity.

The portfolio is constantly being monitored, with ongoing measurement of relative yield, credit, and call potential determining whether any issue should be replaced in the portfolio.

What with all the media buzz about how good a thing the new tax law is turning out to be for corporate America, paying attention to preferreds might turn out to be a very smart idea!

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