# Zero-Dividend Preferred Stock: What it is, Pros and Cons

## What Is Zero-Dividend Preferred Stock?

A zero-dividend [preferred stock](https://www.investopedia.com/terms/p/preferredstock.asp) is a preferred share issued by a company that is not required to pay a [dividend](https://www.investopedia.com/terms/d/dividend.asp) to its holder. The owner of a zero-dividend preferred share will earn income from [capital appreciation](https://www.investopedia.com/terms/c/capitalappreciation.asp) and may receive a one-time payment at the end of the investment term.

### Key Takeaways

*   Zero-dividend preferred stock is preferred stock that does not pay out a dividend.
*   Common stock is still subordinate to zero-dividend preferred stock.
*   Zero-dividend preferred stock earns income from capital appreciation and may offer a one-time lump sum payment at the end of the investment term.
*   Issuers benefit from zero-dividend preferred stock as it allows them to raise capital, holds no voting rights, and pays no dividend.
*   There are a few advantages and disadvantages of zero-dividend preferred stock for investors.

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## Understanding Zero-Dividend Preferred Stock

When a company issues stock, they issue two types: preferred stock and [common stock](https://www.investopedia.com/terms/c/commonstock.asp). Preferred stock has priority over common stock when it comes to dividends and asset distribution and is therefore seen as less risky. Preferred stock usually does not have [voting rights](https://www.investopedia.com/terms/v/votingright.asp), whereas common stock does.

Owners of zero-dividend [preference shares](https://www.investopedia.com/terms/p/preference-shares.asp) will not receive a normal dividend but they will still maintain reimbursement priority over [common shareholders](https://www.investopedia.com/terms/c/common_shareholder.asp) in the event of a bankruptcy. In such an event, they will get a fixed sum that was agreed upon in advance.

Zero-dividend preferred stock is comparable in some ways to [zero-coupon bonds](https://www.investopedia.com/terms/z/zero-couponbond.asp), though they are regarded as lower tier than bonds. Still, they do have upper-tier preference compared with common shareholders if a bankruptcy occurs. This type of stock is usually backed by the issuer’s assets and can be part of split capital investment trusts as a sort of share to produce fixed capital growth in a defined period.

## Why Zero-Dividend Preferred Stock Is Issued

Companies that are likely to issue zero-dividend preferred stock include investment trusts, particularly those that may face challenges getting long-term debt approved. Zero-dividend preferred stock usually comes with a specific time period.

Issuing zero-dividend preferred stock is a way for an investment trust to raise [capital](https://www.investopedia.com/terms/c/capital.asp) that is easier than seeking a loan from a bank, and oftentimes lasts much longer than a bank would typically be willing to lend for. Zero-dividend preferred stock also comes with fewer restrictions than a bank would include in a loan. A zero-dividend preferred stock raises capital, holds no voting rights, and doesn't pay out a dividend. It's an extremely attractive option for a company to issue.

## Advantages and Disadvantages of Zero-Dividend Preferred Stock

There are many advantages and disadvantages for an investor that come with a zero-dividend preferred stock.

### Disadvantages

*   Zero-dividend preferred stocks are vulnerable to increasing [inflation](https://www.investopedia.com/terms/i/inflation.asp), just as bonds are.
*   The fluctuations of the market could see this type of stock be outperformed if the market rises.
*   There is also no guarantee on its yields and the underlying assets could erode in value if the market goes through a downturn.

### Advantages:

*   The lack of taxes that would normally be warranted on dividends. Also, the lump sum payout would be taxed as a [capital gain](https://www.investopedia.com/terms/c/capitalgain.asp) as opposed to net income, which would be at a lower rate.
*   There is an expectation of a predetermined return within the window of time set for the stock.
*   These shares are also predominantly less [volatile](https://www.investopedia.com/terms/v/volatility.asp) when compared with equities.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Stocks](https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks)." Accessed Oct. 8, 2021.
>     
> 2.  Internal Revenue Service. "[Topic No. 409 Capital Gains and Losses](https://www.irs.gov/taxtopics/tc409)." Accessed Oct. 8, 2021.