A zero-dividend preference is a type of preferred share that does not pay dividends but offers capital growth and a fixed redemption value at maturity.
A Zero-Dividend Preference (ZDP) share is a type of preferred share that does not provide regular dividend income to shareholders. Instead, investors receive a predetermined return in the form of capital appreciation, realized when the share is redeemed at a fixed price on a specified future date. These instruments are commonly used within British investment trusts and structured investment vehicles. ZDP shares typically have a fixed maturity period and accrue value over time through compounding, often based on a pre-agreed annual growth rate. They rank above ordinary shares in the capital structure, giving holders preferential treatment in the event of liquidation or wind-up, though they are subordinate to debt holders. Since they don't pay dividends, ZDP shares appeal primarily to investors seeking capital preservation and tax-efficient growth. The value of these shares increases steadily until redemption but is sensitive to the financial health of the issuing trust and the performance of the underlying assets. Investors are exposed to risks if the issuer fails to achieve sufficient asset growth to meet the redemption obligations. In structured finance, zero-dividend preference shares are often used to separate income and capital components within hybrid or split-capital investment trusts, enhancing portfolio customization and risk allocation.
Zero-dividend preference shares can serve a vital role in tax-efficient wealth structuring, especially for family offices focused on intergenerational capital preservation over immediate income generation. The capital appreciation mechanism, absence of dividend income, and preferential asset claims make ZDPs attractive in environments where minimizing taxable distributions is a strategic goal. Additionally, wealth managers can use ZDP shares within bespoke investment vehicles to tailor risk-adjusted returns in multi-tiered capital structures. Their predictable return profile positions them as a conservative growth asset, aligning well with liability-matching, governance frameworks, or trust mandates that prioritize capital security.
A UK-listed investment trust issues zero-dividend preference shares with a £100 par value, set to mature in five years. The agreed annual compound growth rate is 5.25%. At redemption, each ZDP share will be worth approximately £129.43, calculated as £100 × (1.0525)^5. Shareholders accept no interim income but anticipate capital appreciation, assuming the trust's assets grow sufficiently to meet the obligation.
Zero-Coupon Bond
While both zero-dividend preference shares and zero-coupon bonds avoid periodic cash payouts and offer a fixed maturity value, ZDP shares are equity instruments with subordinate claims compared to bonds and are generally more exposed to issuer performance risk. Zero-coupon bonds are debt instruments with higher priority in liquidation and typically less volatility, but also lower potential return.
Do zero-dividend preference shares pay out income over time?
No, ZDP shares do not pay periodic dividends. Instead, they accumulate value internally and pay a fixed amount at redemption, making them a capital-growth-oriented instrument.
How risky are zero-dividend preference shares?
ZDPs are generally lower-risk than ordinary shares due to their preferential claim on assets, but they are still exposed to issuer performance. If the issuing trust’s assets underperform, there may be a shortfall at redemption.
Are zero-dividend preference shares tax efficient?
Yes, in many jurisdictions including the UK, ZDP capital gains may be taxed more favorably than dividends, making them potentially advantageous for tax-conscious investors such as family offices or trusts.
