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URL:  https://boards.fool.com/coolprash-i-would-like-to-address-two-points-in-31219487.aspx

Subject:  Re: Hybrid/Other Annuities Date:  4/22/2014  5:03 PM
Author:  joelcorley Number:  35273 of 36693

coolprash,

I would like to address two points in your post where you wrote, Dangers of buying preferreds.
...
- In default, they fall below bonds in return of capital.
- NOT qualified dividends (so you pay tax rate at your marginal rate)
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These are true statements of PSA preferreds; but not all preferreds have these attributes.

Addressing the second point first, investment trusts (PSA is a REIT - a real estate investment trust) are pass-thru entities. Pass-thru entities usually cannot issue qualified dividends. Only regular corporations can. So if you hold a preferred of a regular corporation - say DFS-B, which is a corporate preferred issued by Discover Financial Services - you will receive qualified dividends.

As to the second point, a number of banks and a few companies create investment trusts that issue preferreds. These trusts are created to sell debt on the stock exchange, instead of through the rather less liquid bond markets. They can be structured so that senior debt is issued to the trust and the trust sells preferred shares. In this type of structure a preferred shareholder, by way of the trust, can be in the same position as other senior bond holders. However, I would also note that as an investment trust, these preferred cannot issue qualified dividends.

BTW, the pass-thru rule on qualified dividends is a significant reason to never to buy something like PFF (iShares S&P US Preferred Stock Index Fund) in a taxable account. This ETF pools qualified and non-qualified income and passes it all through as non-qualified dividends. A fine strategy in a tax-advantaged account, but a poor one in a taxable account.

- Joel
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