In a world where every dollar counts and yield-chasing is the name of the game, zero-dividend preferred stock stands out as a paradox. Why would investors buy a stock that pays no dividends, especially when Australian rates are steady and income remains king? In 2025, this niche security is making a quiet comeback among savvy portfolio architects. Here’s why it’s on the radar, how it works, and what to watch for if you’re considering a stake.
What Is Zero-Dividend Preferred Stock?
Unlike ordinary preferred shares, which typically offer fixed regular payments, zero-dividend preferred stock (also known as ZDPs or zeros) offers no periodic income. Instead, investors purchase the stock at a significant discount to its face value, with the promise of receiving the full value at maturity—usually 5 to 10 years down the line.
- No cash flow until maturity: Investors receive their return as capital growth, not ongoing dividends.
- Priority over ordinary shares: In the event of liquidation, zero-dividend preferred holders are paid before common shareholders, but after debt holders.
- Mostly issued by investment trusts and special vehicles: In Australia, ZDPs are rare, but international exposure (notably in the UK market) is possible via managed funds and global investment platforms.
This structure can be attractive for investors seeking capital protection and potential tax advantages from capital gains over income.
Why Zero-Dividend Preferreds Are Back in Focus for 2025
Several 2025 financial trends are sparking renewed interest in zeros:
- Tax policy changes: The 2025 Federal Budget left franking credits untouched but reinforced capital gains tax (CGT) discount rules for long-term holdings. For high-income earners, capital growth can be more tax-efficient than franked dividends.
- Yield curve flattening: As the Reserve Bank of Australia holds rates steady and the yield curve flattens, traditional income products (like term deposits and high-dividend shares) are less compelling. ZDPs offer a different risk/reward profile.
- Portfolio diversification: With global volatility and an uncertain ASX outlook, zeros can act as a defensive anchor, especially when paired with growth assets.
For example, some Australian family offices are blending UK-listed ZDPs into portfolios to capture capital growth while reducing exposure to local dividend risk. Meanwhile, a handful of ASX-listed investment trusts are considering issuing ZDP tranches to attract capital from sophisticated investors.
Risks, Rewards, and Real-World Scenarios
While zeros sound straightforward, they aren’t risk-free. Here’s what to weigh up:
- Issuer credit risk: If the trust or company behind the ZDP fails before maturity, investors could lose their capital. Assessing the issuer’s asset quality is critical.
- No income flexibility: Unlike hybrid securities or ordinary preferreds, ZDPs provide zero cash flow until redemption. This can be a challenge for retirees or those needing steady income.
- Liquidity and market risk: ZDPs are less liquid than blue-chip shares, with wider bid-ask spreads and limited trading on the ASX. Most access is via overseas markets or managed funds.
Example: In 2025, an Australian investor allocates $100,000 to a UK ZDP with a five-year maturity and a redemption value of $130,000. If the issuer remains solvent and markets are stable, the investor receives the $130,000 at maturity, translating to a compound annual return of roughly 5.4%. If the issuer defaults, however, recovery could be minimal.
It’s also worth noting that, with no regular dividends, there’s no franking credit benefit—a key drawcard of many Australian equities.
How to Access Zero-Dividend Preferreds in Australia
Australian investors can access zeros by:
- Global managed funds: Some international income and alternative asset funds include ZDPs in their holdings.
- Direct offshore trading: Via online brokers with access to the London Stock Exchange or other global markets.
- ASX-listed investment trusts: Watch for new capital-raising structures using ZDP tranches, especially among property and infrastructure managers in 2025.
As with any alternative asset, due diligence is key. Assess the underlying issuer, maturity structure, and your own liquidity needs before committing capital.
