johnnyBuz

When a Corporate invests in Preferred Stock of another Corporate, dividends that it gets from that investment is tax exempted upto 70%, 80% or 100%, based on different conditions.

So, yield on that investment can be taken as after tax yield.

Whereas, say the same Corporate invests in debt securities of another Corporate, interest returns from that investment will be taxed. So yield on that investment would be before tax yield.

So, in order for after tax yields to be similar for both investments, yields from preferred stock are usually less than yields from highest grade bond (debt) of that corporate.