15-4 Pref Stocks

15-4 Pref Stocks - Wall Street pushes Preferred Stock Tax...

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Wall Street pushes Preferred Stock – Tax Cut spurs Interest in Dividend-Rich Shares, but Many don't Qualify for New Low Rate Source: Wall Street Journal, 19 August 2003 THE LOWER tax rates on dividends and anemic yields on bonds have more investors eyeing preferred stock, and Wall Street is rushing out mutual funds to meet the demand. Preferred stocks are one of various securities that companies issue to raise money. While they are called stock, they act more like bonds. Their shares generally carry a fixed dividend and their prices move with interest rates. In just the past year or so, Wall Street has launched at least 13 mutual funds that focus on preferred stock. Planners are increasingly steering clients into these funds, largely because most of them yield in excess of 8% annually -- far exceeding what investors can find in government bonds and most investment-grade corporate bonds. Now, there's talk that corporations may begin issuing more preferred shares to benefit from recent tax-law changes that cap tax rates on dividends at just 15%. But there's a dirty secret about preferred stock: Most of the issues that currently trade don't qualify for the lower tax treatment. That's because their shares aren't true preferred stock kicking off dividends, but are technically trusts that pay interest. Those payments, in turn, are taxed at ordinary income rates as high as 35%. The result is that preferred stocks aren't the slam-
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15-4 Pref Stocks - Wall Street pushes Preferred Stock Tax...

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