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Preferred dividends are cash distributions a company pays on its preferred shares.

Preferred shares provide their holders ownership in a company, much like common shares. But preferred shares have advantages over common shares.

Preferred shares’ biggest advantage is their higher dividend rates. These dividends are also guaranteed and paid on a regular schedule, so preferred shareholders know when to expect them.

Preferred shareholders can claim dividends before common shareholders when a company declares bankruptcy. Common shareholders won’t receive money until all preferred shareholders have been paid, so the company may exhaust its assets before common shareholders receive everything they’re owed.

A company’s board of directors decides when to pay dividends for common stock, which causes the amount of common stock dividends to fluctuate more than preferred dividends.

The guarantee and fixed rates of preferred dividends give them similar characteristics to a fixed income instrument, like a bond. Many risk-averse investors like preferred dividends for the portfolio security they offer, despite their lack of voting rights.

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