Yield-hungry investors who purchased so-called preferred stocks in recent years may be disappointed to find that their "dividends" won't qualify for the new lower federal tax rates.
The tax-reform law passed by Congress last week will cut the maximum tax rate on dividend income to 15% from 38.6%.
But the lower rates apply to true dividends, such as on common stocks. By contrast, most companies that have issued preferred stocks in recent years have structured those securities to pay interest rather than dividends -- even though investors often have continued to think of the payments as dividends.
Interest earnings will continue to be taxed at ordinary rates, as high as 35%.
Preferred stock has long been used by U.S. companies to raise capital. The shares typically don't carry voting rights, but pay a fixed return that often has been comparable to or better than what investors could earn on bonds.