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I'm reading about detachable warrants and it says that:

Because they are attached to preferred stock, investors may not be able to receive dividends for as long as they hold the warrants.

(https://www.investopedia.com/terms/d/detachable_warrant.asp)

Could you help me understand this? Why can't you receive dividend while holding the warrant?

2 Answers 2

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The source you cited is likely wrong.

Preferred stock would have custom, ad hoc terms regardless. A company could definitely sell preferred stocks with detachable warrants that still gets dividends.

Maybe the author of that article is implying it's standard practice to do such a thing, but I don't think so. The value of the preferred stock would be little without detaching the warrant and selling it. No one would keep the warrant unless they effectively wanted a call option instead of the preferred stock. By definition, 'detachable' implies they are two separate securities that do not depend on each other. But even with non-detachable, the two securities together are effectively a call option instead of preferred stock. Basically, in that sort of structure, the warrant detracts from the value of the preferred stock instead of being 'upside', which it's designed to be while lowering interest/yield for the company.

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  • Thanks for your answer! I wonder why the value of the preferred stock would be smaller with the warrant attached? Why wouldn't people want a call option on top of the shares? Jan 6 at 8:09
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    If the warrant attached prevents a dividend from being received, then the warrant will decrease the value of the preferred stock relative to preferred stock that receives a dividend. The combined security (Preferred w/o div + warrant) may have a greater value than preferred stock w div depending on the warrant's value.
    – Ryan
    Jan 6 at 16:02
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    Call options and warrants are effectively the same, but warrants are attached to another security issued by the company itself for new shares and may have very low strike prices. Warrants are given as a 'kicker' upside to lower yield on preferred/debt. Call options are used for hedging purposes and speculative trading by 3rd parties. There is generally not a downside to a warrant. I guess my point is if a warrant 'prevents' dividends, then the warrant and preferred stock have conflicting value adds/detracts, so I have no idea what kind of investor would be interested in such a combo security.
    – Ryan
    Jan 6 at 16:08
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I'm not saying that this doesn't exist but in 20+ years of investing in and trading preferred stocks, as well as buying IPOs of preferred stocks, I have never seen this.

OTOH, I have seen and traded many equity IPOs that had one or more warrants attached. Until the warrant(s) becomes detachable, you can only trade the unit as a whole. Once the warrants trade on their own, you can buy or sell any part of the unit that you like.

It makes no sense to me that one would not receive a dividend on a preferred stock as long as one holds the warrant. The stock either pays a dividend or it doesn't. I can't help with bonds since I don't own or trade them.

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