What are the differences between traditional preferreds and hybrid preferreds?
It is all basically a matter of taxes. In other respects, the two are really very similar. Traditional preferreds are treated for tax purposes just like any other equity security such as common stock. The issuer receives no deduction for tax purposes for the dividend payments made to the holders of the preferred. On the other hand, those dividends are 70% tax free to corporate investors due to the Dividend Received Deduction (“DRD”). The purpose of the DRD is to eliminate in part the double taxation of these dollars at the corporate level that would otherwise occur. Additionally, with the enactment of the Jobs and Growth Tax Reconciliation Act of 2003, these securities generally classify as qualified dividend income (QDI) to individual investors. QDI is currently taxed at a maximum rate of 15% to individual investors.
