Key Takeaways
- No regular dividends; returns from capital gains.
- Fixed redemption value at maturity.
- Priority over common stock in liquidation.
- Hybrid equity-debt features with predictable payout.
What is Zero-Dividend Preferred Stock?
Zero-dividend preferred stock (ZDPS) is a type of preferred stock that does not pay periodic dividends, offering returns mainly through capital appreciation and a fixed redemption amount at maturity. This hybrid security combines elements of equity and debt, providing priority over common stock in liquidation but ranking below debt holders.
Investors seeking growth rather than income often consider ZDPS, which are popular among companies aiming to raise capital without immediate cash outflows, especially in sectors featured in our best growth stocks guide.
Key Characteristics
Zero-dividend preferred stock has distinct traits that differentiate it from traditional preferred shares:
- No dividends: ZDPS pays no regular dividends; returns come solely from the difference between purchase price and fixed redemption value, akin to a face value repayment.
- Fixed redemption value: Investors receive a predetermined amount at maturity, providing a measure of predictability absent in common stock.
- Liquidation priority: ZDPS holders have higher claim on assets than common shareholders but are subordinate to debt holders like zero-coupon bonds.
- Optional features: Some issues may be callable, allowing the issuer to redeem early at a premium.
- Hybrid nature: Combines debt-like fixed redemption with equity characteristics, often used by investment trusts and growth companies.
How It Works
When you invest in zero-dividend preferred stock, you buy shares at an initial price with the expectation that the company will redeem them at a higher fixed amount on a set maturity date. Unlike traditional preferred shares, you do not receive dividend income but benefit from capital appreciation over time.
The issuer uses the proceeds to fund operations or growth, avoiding dividend payments that would strain cash flow. At redemption, you receive the predetermined payout, similar to holding a discounted bond, but with equity risk and priority ranking as described in our A-B trust definitions.
Examples and Use Cases
Zero-dividend preferred stock is often used in specific industries and financial structures to balance growth financing and investor returns.
- Airlines: Companies like Delta may issue preferred stock variants to support fleet expansion without immediate dividend payouts.
- Investment trusts: Many UK trusts issue ZDPS to leverage capital, enhancing returns for ordinary shareholders while managing cash flow.
- Growth companies: Startups avoid dividend obligations during early expansion phases, offering zero-dividend preferred shares convertible to common stock for upside potential.
Important Considerations
Investing in zero-dividend preferred stock requires assessing the trade-offs between income and growth. Since there are no dividend payments, ZDPS suits investors focused on capital gains rather than current income.
Liquidity can be limited compared to dividend-paying stocks, and returns depend heavily on issuer performance and market conditions. Understanding how ZDPS fits into your portfolio alongside other instruments like dividend stocks is essential for balanced exposure.
Final Words
Zero-dividend preferred stock offers a predictable capital return with priority over common shares, making it suitable for growth-focused investors seeking fixed redemption value without dividend income. To evaluate if ZDPS fits your portfolio, compare specific terms and run the numbers against other fixed-income and equity options.
Frequently Asked Questions
Zero-Dividend Preferred Stock (ZDPS) is a type of preferred stock that does not pay regular dividends. Instead, investors earn returns through capital appreciation and a fixed redemption value at a set maturity date.
Unlike traditional preferred stock, which pays fixed dividends, ZDPS pays no periodic dividends. Returns come mainly from the growth in share price and a predetermined payout when the stock matures.
ZDPS offers potential capital growth with a fixed redemption value, priority over common stock in liquidation, and predictable returns if held to maturity. It’s appealing for investors focused on appreciation rather than income.
Yes, ZDPS does not provide regular income, making it unsuitable for income-focused investors. Additionally, these stocks often have lower liquidity and may yield less than dividend-paying preferred stocks or bonds.
Companies and investment trusts, especially growth-stage firms like tech companies, issue ZDPS to raise capital without the burden of paying dividends. This helps conserve cash flow during expansion periods.
The fixed redemption value is a predetermined amount paid to investors when the ZDPS matures, often higher than the issue price. This feature provides investors with a predictable capital return if they hold the stock until maturity.
ZDPS holders have priority over common shareholders when assets are distributed during liquidation but rank behind bondholders. This gives them a higher claim to company assets than common stock investors.
Yes, some ZDPS may include optional features such as convertibility into common stock or callability, allowing the issuer to redeem the shares early at a premium. These features can add flexibility for both investors and issuers.
