Quarterly Income Preferred Securities (QUIPS)

Quarterly Income Preferred Securities (QUIPS)

Quarterly Income Preferred Securities (QUIPS) are preferred shares that pay dividends on a quarterly schedule. They combine characteristics of both stocks and bonds and are primarily issued to provide regular income with higher priority to dividends than common equity.

Key characteristics

• Dividend priority: Preferred holders receive dividends before common shareholders and have a higher claim on assets in a liquidation than common stockholders, but they rank behind bondholders.
• Quarterly payouts: Dividends are typically paid every quarter and are often expressed as a percentage of par value.
• Hybrid features: QUIPS behave like equity (ownership stake, potential upside) and like debt (scheduled income), which appeals to income-focused investors.
• Perpetual vs. term: Many preferreds are perpetual (no maturity); some issues include a fixed redemption date.
• Callable and convertible provisions: Issuers may reserve the right to redeem (call) shares at a set price after a specified date. Some preferreds can be converted into common shares under defined terms.
• Cumulative vs. noncumulative: Cumulative preferreds accrue unpaid dividends that must be paid before common dividends; noncumulative preferreds do not carry forward missed payments.
• Tax and credit considerations: Dividend payments may receive more favorable tax treatment than bond interest for certain investors. Preferred shares are equity for the issuer and do not create creditor claims, so missed dividends do not constitute default.

How QUIPS compare to common stock and bonds

Versus common stock
* QUIPS offer more predictable income and priority for dividends, but generally less price appreciation and limited (or no) voting rights.
* Preferreds are typically more stable in price and trade closer to par value than common shares.

Versus bonds
* Both offer periodic payments, but bond interest is contractual and typically fixed; preferred dividends can be reduced or suspended at the issuer’s discretion.
* Bonds sit ahead of preferreds in bankruptcy recovery, and bonds usually mature on a set date while many preferreds do not.
* Preferreds often carry higher yields than the issuer’s bonds, reflecting lower seniority and fewer creditor protections.

Common features and terms to watch

• Par value and yield: Dividends are usually stated as a percentage of par. Market price may trade at discount or premium to par depending on credit quality and interest-rate environment.
• Call date and call price: If callable, the issuer can redeem shares at the call price, often when interest rates fall.
• Convertibility: Some QUIPS allow holders to convert to common shares at a defined ratio or under certain conditions.
• Participation: Participating preferreds can receive additional dividends tied to company performance, above the stated rate.
• Credit and bank regulatory issues: Banks and other issuers may use preferreds for capital management; regulatory rules can influence issuance terms (for example, whether a preferred is classified as regulatory capital).

Who buys QUIPS?

• Income-focused individual investors seeking regular dividends.
• Institutions and funds attracted by tax or accounting advantages and bulk purchase opportunities.
• Investors who want a middle ground between bonds (safety) and common stock (growth).

Advantages

• Regular, predictable quarterly income.
• Higher claim on dividends and assets than common equity.
• Potentially favorable tax treatment for dividend income (varies by investor type and jurisdiction).
• Less price volatility than common stock in many cases.

Risks and drawbacks

• Dividends are not guaranteed and can be suspended at the board’s discretion.
• Subordination to debt means higher credit risk in bankruptcy.
• Limited capital appreciation compared with common stock.
• Callable features can cap long-term upside if the issuer redeems the issue.
• Interest-rate sensitivity: rising rates can depress market prices of preferreds.

Practical example

A 7% preferred with $1,000 par value pays $70 per year, or $17.50 quarterly. Such an issue tends to trade around par and is chosen by investors prioritizing income over capital gains.

Tips for investors

• Check whether the preferred is cumulative or noncumulative.
• Note call provisions and the first date the issuer can redeem the shares.
• Understand convertibility terms if the issue is convertible.
• Evaluate issuer creditworthiness—preferreds are equity-like and depend on the issuer’s financial health.
• Consider tax treatment for your specific situation; consult a tax advisor if needed.

Bottom line

QUIPS are a type of preferred security designed to deliver steady quarterly income with greater dividend priority than common stock. They suit investors seeking regular payouts and a middle ground between bonds and common equity, but carry equity risks: dividends can be cut, and recovery in default is behind bondholders. Assess terms (cumulative status, callability, convertibility) and issuer credit before investing.