Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that resembles properties of both an equity and a debt instrument and generally considered a hybrid instrument. Preferreds are senior (i.e. higher ranking) to common stock, but are subordinate to bondsUnlike the tax treatment of typical preferred securities, taxable
preferred securities do not qualify for the dividends-received
deduction for corporations (under Section 243 of the Internal Revenue
Code of 1986, as amended).
In simple words , it is a type of preferred equity security that does not qualify for the dividends-received deduction for corporations of typical preferred securities, defined in Section 243 of the Internal Revenue Service (IRS) Code. Taxable preferred securities are usually junior level liabilities, and the coupons tied to them can either be fixed or variable, and for indefinite or specific maturities.
It is also known as “hybrid preferred securities”.
The tax treatment of these securities is more favorable for corporations and less for investors, causing them to typically trade at higher yield spreads than regular preferreds. This type of security started to take off in the mid-1990s. Their proliferation has led to several funds and exchange-traded funds that invest solely in taxable preferreds.