Preferred Dividend Yields and Equity

Definition

Preferred equity is an ownership class with priority over common equity for dividends and for payment on liquidation, usually in exchange for limited or no voting rights; the preferred dividend yield is its stated dividend divided by its price. Its terms come from state corporate law and the issuer's charter, and federal law treats it as a security^[1]; dividends on preferred stock of domestic corporations can be qualified dividend income taxed at capital gain rates^[2], a treatment made permanent in 2013.^[3]

Federal law

Formed under state law. No Act of Congress creates it; the federal laws below apply to it as described.

1. Securities Act of 1933, Act of May 27, 1933, ch. 38, title I, § 2(1), 48 Stat. 74. Securities Act of 1933 § 2(1) (now § 2(a)(1)): 'security' includes stock, including preferred stock. Official text: govinfo.gov, U.S. Government Publishing Office.
2. Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L. 108-27, § 302, 117 Stat. 760. Created 'qualified dividend income' (26 U.S.C. § 1(h)(11)) taxed at capital gain rates; applies to dividends generally, not specifically to preferred stock. Official text: govinfo.gov, U.S. Government Publishing Office.
3. American Taxpayer Relief Act of 2012, Pub. L. 112-240, § 102, 126 Stat. 2318. Made the 2003 qualified-dividend treatment permanent. Official text: govinfo.gov, U.S. Government Publishing Office.