Financial Blog

Are you an experienced investor who is looking to further diversify your debt and equity investments? Or perhaps you would like to invest in other high-yielding securities issued by leading corporations other than fixed income securities (e.g., corporate retail bonds)? If your answer is yes, then investing in SEC-registered preferred shares might be for you.

What are SEC-Registered Perpetual Preferred Shares?

SEC-Registered Perpetual Preferred Shares are publicly-listed equity securities wherein investors have preferential claim on the earnings, in the form of dividends, and on the assets of a company upon liquidation compared to common shareholders.

Common features of an SEC-Registered Preferred Shares:

Here are some features you might want to learn regarding SEC-registered preferred shares to educate yourself before finally starting to invest:

1. Cumulative – Allows an issuing company to accumulate undeclared / deferred dividend payments, which must be settled before declaration of any other dividends.
2. Non-voting – Generally, does not assign voting rights to preferred shareholders.
3. Non-participating – Does not entitle shareholders to participate in any other dividends beyond the agreed fixed dividend rate.
4. Non-convertible – Does not provide the option to convert into any other preferred shares or common shares of the issuing company at any given point in time.
5. Redeemable – Provides the issuing company the option but not the obligation to redeem the preferred shares at specified dates and prices.
6. Perpetual – Does not have maturity date but contains a step-up feature wherein dividend rates are materially increased ​in case the listed shares are not redeemed at predetermined dates, at the sole option of the issuing company.

Why invest in SEC-Registered Preferred Shares?

• Higher dividend yield

  Provides higher yield compared to fixed income securities (e.g., retail bonds) due to equity premium.

• Preference in dividends

  Has priority in dividend payments over common shareholders.

• Priority of claim upon liquidation

  Provides its holders with priority claim on a company’s assets upon liquidation versus common shareholders.

• Lower tax rates on dividends

  Subject to lower final withholding tax for retail (10%) and none for corporate investors vis-à-vis fixed income securities (e.g., retail bonds) (20%).

What are the Risks of Investing in SEC-Registered Preferred Shares?

Here are some risks you might want to consider before finally deciding to invest in SEC-registered preferred shares:

1. Reinvestment Risk – Exercise of redemption option may be done at times where interest rates may be lower than at the time of issuance.
2. Volatility Risk – Market price is subject to fluctuations brought about by various factors including economic and political conditions in the country.
3. Liquidity Risk – Active secondary market may not develop.
4. Redemption Risk – For perpetual preferred shares, the shareholders have no right to require the issuing company to redeem the shares and they can only dispose of the shares by sale in the secondary market.
5. Deferral of dividend payments – Dividends may not be paid or may be partially paid on payment dates if the issuing company does not have sufficient retained earnings to pay such dividends.
6. Subordination to other debt obligations – The shares rank junior in right of payments and claims to other indebtedness of the issuing company.
7. Limited voting rights – Holders of SEC-Registered Preferred Shares will not be entitled voting rights except as specifically set forth in the amended articles of incorporation of the issuing company and as provided by the Philippine law.

Should you invest?

If you’re looking for an investment option that may give you high dividend yield similar to other fixed income securities while also giving you priority on dividend and claims upon liquidation over the common shareholders, then SEC-registered Preferred Shares might be for you. But like we’re always saying, you should first assess your risk appetite and have emergency funds ready before investing in any asset.

To help you more about investments, we recommend that you learn the basics and fundamentals of investing first. You can start by browsing our investing blogs here.