What Are Preferred Dividends?
Let me explain preferred dividends directly: these are the cash payments a company makes to its preferred shareholders. If the company can't cover all dividends, you as a preferred shareholder get paid first before anyone with common shares sees a dime.
Understanding Preferred Dividends
You need to know that preferred stock often comes with higher dividend rates than common stock from the same company. The company sets out all its preferred dividend obligations upfront, so it has to set aside funds, and these can build up if not paid. Remember, these dividends come out of net income before even thinking about common-share payouts.
As a board decides on common stock dividends based on profits and priorities, preferred ones are fixed. They're based on the stock's par value and a set dividend rate. In high inflation, this fixed setup might not favor you since it's tied to a real interest rate without adjustments.
How to Calculate Preferred Dividends
Calculating this is straightforward: take the dividend rate and multiply it by the par value from the stock's prospectus to get the annual preferred dividend. If payments are quarterly, divide that total by four for each installment.
You can check a company's health through the preferred dividend coverage ratio—it shows how easily it can meet these payments. A high ratio means no trouble paying what it owes to preferred shareholders like you.
Dividends in Arrears
If a company skips dividends, they pile up as arrears for preferred shareholders, and you have to get those paid before common shareholders get anything. This is a legal must for cumulative preferred stock, and it's all reported in financial statements. Noncumulative ones? Those arrears can just be ignored.
Other Preferred Dividend Features
Preferred shareholders like you usually trade away rights to extra earnings for that dividend priority. Some get participation rights for dividends beyond the fixed rate, but most don't. Callable preferred stock means higher dividends because you're giving up long-term security—if called, future dividends might factor into the buyback. Convertible ones offer lower dividends but the option to switch to common stock.
Frequently Asked Questions
What's a benefit of preferred dividends? They typically pay more than common stock dividends from the same company, with obligations set in advance and accumulating if unpaid.
What are they based on? The par value and dividend rate of the preferred stock—fixed, which can be a downside in inflation since it's unadjusted.
How is the preferred dividend determined? Multiply the rate by par value for the annual total, then divide by payment periods for installments.
The Bottom Line
In summary, preferred dividends go to preferred shares first, and if payments fall short, those claims beat out common share ones every time.
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