What are Preferred Dividends?
Definition: Preferred dividends are the dividends that are paid to a company’s preferred shareholders. This class of shareholders is entitled to receive dividends before payments are made to common shareholders. If a company does not have the resources to pay its preferred stockholders in a particular year, the preferred dividends could accumulate and be paid at a later date.
What do Preferred Dividends mean?
An important feature of preferred dividends is that they are paid at a fixed rate. Each preferred shareholder receives a predetermined amount on a yearly or a quarterly basis. The dividend amount is a percentage of the par value of the stock.
A shareholder who owns preferred stock in a company will receive dividends that are calculated in the following manner:
Preferred dividends = Par value of the preferred stock X Rate of dividend X Number of shares
The dividend rate on preferred stock is usually higher than the rate that is paid on common stock. Consequently, preferred stock can be viewed as a hybrid instrument that incorporates the features of stocks as well as bonds. Preferred stocks are similar to bonds as they pay a fixed rate of dividend and stockholders are assured of receiving a return on their investment as long as the company has the capacity to pay.
Example of Preferred Dividends
Brian Spencer holds 100 shares of cumulative preferred stock in Green Petroleum Corporation. The par value of the stock is $100, and the dividend rate is 8%.
The company has not paid preferred dividends for the last three years, as it did not make an adequate level of profits. However, with the increase in the price of oil, the company has returned to profitability.
In 2018, Brian receives $3,200 in preferred dividends. This is calculated as follows:
⇨ Current year’s preferred dividend: Par value of the preferred stock X Rate of dividend X Number of shares
Current year’s preferred dividend: $100 X 8% X 100 = $800
⇨ Arrears for the last three years: $800 X 3 = $2,400
Total dividend received: $800 + $2,400 = $3,200
Preferred dividends can provide steady and predictable returns to shareholders. Investors who are looking for stable returns often opt for preferred stock because of this reason.