Preferred Dividend

Definition

Preferred Dividend represents a financial distribution made by corporations to owners of preferred stock, drawn from corporate earnings and profits. These dividends take precedence over common dividends, meaning that preferred shareholders are paid before common shareholders receive any dividend. The specific terms of preferred dividends, including frequency and amount, are generally specified in the company’s charter and can be fixed or variable.

Examples

Fixed Preferred Dividend: A corporation issues preferred stock with a par value of $100 and an annual dividend rate of 6%. Regardless of the company’s performance, preferred shareholders will receive a $6 dividend per share annually.
Cumulative Preferred Dividend: If a company cannot pay dividends in a given period, the unpaid dividends accumulate and must be paid out in the future before any common dividends can be distributed.
Participating Preferred Dividend: Preferred shareholders may receive their fixed dividend and participate in additional earnings distributions, sharing in the profits beyond their fixed dividend.

Frequently Asked Questions

1. What are the advantages of preferred dividends for investors?

Preferred dividends provide a stable and generally predictable income stream and have payment priority over common dividends.

2. Are preferred dividends guaranteed?

No, preferred dividends are not guaranteed. They depend on the corporation’s profitability. However, cumulative preferred dividends offer some level of back payment if dividends are missed.

3. How are preferred dividends taxed?

Preferred dividends are typically taxed at the same rate as ordinary dividends, which can be lower than regular income tax rates, depending on jurisdiction and specific tax laws.

4. Can preferred dividends change?

Yes, variable preferred dividends can change based on stipulations in the stock agreement, such as being tied to an index or the company’s financial performance.

5. How often are preferred dividends paid?

Preferred dividends are commonly paid quarterly, but the specific payment schedule can vary depending on the company’s policy.

Preferred Stock: A class of ownership in a corporation with a higher claim on assets and earnings than common stock. Preferred stock typically pays a fixed dividend.
Common Dividend: Dividend payments made to common shareholders, issued after payments to preferred shareholders have been made.
Cumulative Dividend: Dividends on preferred shares that accumulate if not paid when due and must be paid in full before any dividends can be paid to common shareholders.
Participating Preferred Stock: Shares that provide the holder with a fixed dividend and the opportunity to receive additional dividends based on company performance.
Non-Cumulative Dividend: A type of preferred dividend that does not accumulate if omitted. Missed payments are not required to be paid in the future.

Online References

Suggested Books for Further Studies

“The Intelligent Investor” by Benjamin Graham - This classic book contains valuable insights on preferred stock and dividends as part of an investment strategy.
“Investing in Preferred Stock: An Investor’s Guide” by Barbara Cohen - This book provides an in-depth look at the benefits and risks associated with investing in preferred stock.
“Preferred Stock Investing” by Doug K. Le Du - A comprehensive guide on navigating and investing in preferred stock.
“Dividends Still Don’t Lie” by Kelley Wright - This book discusses the role of dividends in investment strategy and financial planning.

Fundamentals of Preferred Dividend: Investment and Finance Basics Quiz

### Which takes priority, preferred dividends or common dividends? - [x] Preferred dividends - [ ] Common dividends - [ ] Both are paid simultaneously - [ ] Neither has priority > **Explanation**: Preferred dividends take priority over common dividends, meaning preferred shareholders are paid first. ### What type of preferred dividend accumulates if unpaid and must be paid in full before any common dividends? - [x] Cumulative dividend - [ ] Non-cumulative dividend - [ ] Participating dividend - [ ] Fixed dividend > **Explanation**: Cumulative dividends accumulate if not paid when due and must be paid in full before any dividends are paid to common shareholders. ### What term describes preferred shares that not only receive fixed dividends but also a portion of additional earnings? - [ ] Cumulative preferred stock - [x] Participating preferred stock - [ ] Fixed rate preferred stock - [ ] Convertible preferred stock > **Explanation**: Participating preferred stock provides the holder with fixed dividends and an opportunity to receive additional dividends based on excess company earnings. ### Are preferred dividends guaranteed regardless of corporate performance? - [ ] Yes, they are guaranteed - [x] No, they depend on corporate earnings - [ ] Only guaranteed in profitable years - [ ] Guaranteed only on semi-annual terms > **Explanation**: Preferred dividends depend on the corporation's profitability and are not guaranteed in years where the corporation does not have sufficient earnings. ### How often are preferred dividends typically paid? - [x] Quarterly - [ ] Monthly - [ ] Annually - [ ] Biennially > **Explanation**: Preferred dividends are commonly paid quarterly, though the specific payment schedule can vary with the company's policy. ### In what type of preferred dividend does the unpaid dividend not accumulate if omitted? - [ ] Cumulative dividend - [x] Non-cumulative dividend - [ ] Participating dividend - [ ] Adjustable-rate dividend > **Explanation**: Non-cumulative dividends do not accumulate if unpaid and hence do not need to be paid in future periods if missed. ### Which investment class generally has a fixed dividend rate? - [x] Preferred Stock - [ ] Common Stock - [ ] Bonds - [ ] Index Funds > **Explanation**: Preferred stock typically pays a fixed dividend rate, which is determined when the stock is initially issued. ### Are taxing regulations on preferred stock dividends different from common stock dividends? - [ ] No, they are the same - [x] Yes, they can often be subject to different rates - [ ] Preferred stock dividends are not taxed - [ ] Common stock dividends are not taxed > **Explanation**: Preferred stock dividends can often be subject to different tax rates compared to common stock dividends, depending on jurisdiction and specific tax laws. ### Do preferred shareholders have voting rights in the company? - [ ] Yes, always - [x] Generally, no - [ ] Only in special cases - [ ] Only for major decisions > **Explanation**: Generally, preferred shareholders do not have voting rights in the company, unlike common shareholders. ### What is the benefit of including preferred stock in one's investment portfolio? - [x] Provides a stable income stream with higher claim on earnings - [ ] Guarantees capital appreciation - [ ] Offers complete tax exemption - [ ] Allows for participation in daily company operations > **Explanation**: Including preferred stock in an investment portfolio can provide a stable income stream and typically offers a higher claim on earnings than common stock, ensuring priority in dividends payment.

Thank you for exploring the world of preferred dividends and participating in this quiz to deepen your understanding of investment and finance basics. Happy investing!