Preferred Dividend
Preferred Dividend: Dividends that are accorded priority over common stock dividends and are typically set at a fixed rate.
Understanding Preferred Dividends
Preferred dividends are payouts to shareholders from a company’s earnings, specifically for owners of its preferred shares. Unlike common dividends, which can fluctuate in amount and frequency, preferred dividends typically offer fixed payments. We see preferred dividends as a way to provide income stability to investors.
Preferred Stock characteristics are critical to understanding preferred dividends. Although preferred shares carry no voting rights, they often enjoy priority over common stock when dividends are distributed. If a company must omit a dividend, they must pay preferred shareholders first before common shareholders receive anything.
Dividend Rate usually refers to the annual percentage of the par value of the preferred stock that we pay as dividends. For example, if a preferred stock has a par value of $100 and a dividend rate of 5%, the annual dividend per share would be $5.
Our calculation of dividends is straightforward. Assuming our company decides to distribute a $2.00 dividend on its 5% preferred stock with a $100 par value, it would look something like this:
| Preferred Stock Details | Calculation |
|---|---|
| Par Value | $100 |
| Dividend Rate | 5% |
| Annual Dividend | 5% of $100 = $5.00 per share |
| Semi-Annual Dividend | $5.00 / 2 = $2.50 per share |
| Quarterly Dividend | $5.00 / 4 = $1.25 per share |
We often express preferred dividends in dollars per share (DPS) when we declare or distribute them. Our investors find that owning preferred shares is a way to potentially secure a steady stream of income, given the fixed dividend rate, although it’s essential to acknowledge that dividends are never guaranteed.