Loading the player...

What is a 'Preferred Dividend'

A preferred dividend is a dividend that is accrued and paid on a company's preferred shares. In the event that a company is unable to pay all dividends, claims to preferred dividends take precedence over claims to dividends that are paid on common shares. The main benefit of preferred stock is that it typically pays much higher dividend rates than common stock of the same company.

BREAKING DOWN 'Preferred Dividend'

Preferred dividends are issued based on the par value and dividend rate of the preferred stock. While preferred dividends are issued at a fixed rate based on their par value, this may be unfavorable in high inflation periods. This is because the fixed payment is based on a real rate of interest and is typically unadjusted for inflation.

How to Calculate Preferred Dividend

All issuances of preferred stock contain the equity’s dividend rate and par value in the preferred stock prospectus. The dividend rate multiplied by the par value equates to the total annual preferred dividend. If the total dividend to be received is paid out in installments, such as in quarters, the issuer simply divides the total preferred dividend by the number of periods to get an approximate installment payment.

Dividends in Arrears

A business may elect to forgo payment of dividends. Because preferred stockholders have priority over common stockholders in regards to dividends, these forgone dividends accumulate and must eventually be paid to preferred shareholders. Therefore, preferred stock dividends in arrears are legal obligations to be paid to preferred shareholders before any common stock shareholder receives any dividend. All previously omitted dividends must be paid before any current year dividends may be paid. Preferred dividends accumulate and must be reported in a company’s financial statement. Noncumulative preferred stock do not have this feature, and all preferred dividends in arrears may be disregarded.

Other Preferred Dividend Features

Preferred stockholders typically receive the right to preferential treatment regarding dividends, in exchange for the right to share in earnings in excess of issued dividend amounts. Some preferred stockholders may receive the right of participation, in which their dividends are not restricted to the fixed rate of interest. However, a majority of preferred stock issuances are nonparticipating. Callable preferred stock results in higher preferred dividends, as investors are sacrificing long-term security. If the preferred stock is retired at the call price, future preferred dividends may be included in the repurchase. Convertible preferred stock has lower preferred dividends, as the investor receives the additional of converting the preferred stock to common stock.

RELATED TERMS
  1. Preference Shares

    Preference shares are company stock with dividends that are paid ...
  2. Preferred Stock

    A class of ownership that has a higher claim on assets and earnings ...
  3. Current Dividend Preference

    A safety feature of preferred shares, whereby holders of such ...
  4. Noncumulative

    A type of preferred stock that does not pay the holder any unpaid ...
  5. Convertible Adjustable Preferred ...

    A preferred, floating rate issue, whose interest rate is tied ...
  6. Perpetual Preferred Stock

    A perpetual preferred stock is a type of preferred stock that ...
Related Articles
  1. Investing

    Preferred stocks: A primer

    Offering both income and relative security, these uncommon shares may work for you.
  2. Investing

    Valuation Of A Preferred Stock

    Determining the value of a preferred stock is important for your portfolio. Learn how it's done.
  3. Financial Advisor

    4 Reasons a Company Might Suspend Its Dividend

    Learn about the four most common reasons a company may choose to suspends its dividends, including financial trouble, funding growth and unexpected expenses.
  4. Investing

    Preferred Stock ETFs With Huge Dividends

    If you prefer huge dividend yields, you might want to consider having a preferred stock ETF in your portfolio.
  5. Managing Wealth

    Taking The Bite Out Of A Bear Market

    Find out which financial instruments will protect you from bear market volatility.
  6. Investing

    Why Dividends Matter

    Seven words that are music to investors' ears? "The dividend check is in the mail."
  7. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  8. Investing

    AAPL: Apple Dividend Analysis

    Apple's dividend has had healthy growth ever since its 2012 reinstatement, thanks to Apple's continuously rising revenue, earnings and operating cash flow.
RELATED FAQS
  1. What are the advantages and disadvantages of preference shares?

    Preference shares have advantages and disadvantages for both investors and issuing companies. Read Answer >>
  2. What are the different types of preference shares?

    Find out four types of preference shares – callable, cumulative, convertible and participatory - and how each benefits you ... Read Answer >>
Hot Definitions
  1. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  4. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
Trading Center