What is monthly income preferred stock?

A hybrid security, popular in the 1990s, that combines features of preferred stock and bonds.

Where have you heard about monthly income preferred stock?

In the late 1990s, monthly income preferred stocks (MIPS) were very popular due to a tax shelter loophole. This has since been closed and MIPS are now considered to be preferred stock.

What you need to know about monthly income preferred stock.

Monthly income preferred stocks were introduced to the market by Goldman Sachs in 1993. The complicated structure of the stock acted as a tax shelter for the parent company.

The issuer of the securities created a special purpose entity to sell the preferred stock to the public. The proceeds were then lent to the corporate parent and the interest expense payments were used to pay dividends to the preferred stakeholders. As the interest payments were tax deductible, this reduced the corporate parent's tax bill.

MIPS securities often had a higher rate of return than preferred stock, making them popular investments. As MIPS can no longer be used as a tax shelter, they’re now classed as preferred stock and are typically issued with a $25 par value.

Find out more about monthly income preferred stock.

To understand more about the features of preferred stock, read our definition.