Does Preferred Stock Get Dividends? How It Works

Preferred stock is a unique type of equity that represents ownership in a company. It blends characteristics of both common stock and bonds, making it a hybrid security. Preferred stock typically provides a specific claim on income from the company’s operations. It usually receives dividends, which distinguishes it from common stock. This security offers features regarding dividend payments, appealing to investors seeking a predictable income stream.

Understanding Preferred Stock

Preferred stock is an equity instrument with distinct features setting it apart from common stock. It typically pays a fixed dividend amount, unlike common stock dividends, which are variable and depend on company performance. This fixed payment can be expressed as a percentage of the stock’s par value or as a specific dollar amount per share. Preferred stockholders generally have a higher claim on company earnings for dividends, meaning they must be paid before any dividends are distributed to common stockholders.

In a company’s liquidation, preferred stockholders have a higher claim on assets compared to common stockholders, but rank below bondholders. This priority provides a layer of security for preferred shareholders. Preferred stock usually carries no or very limited voting rights in corporate governance. Common stockholders typically have voting power on company matters.

Companies may issue preferred stock with other features, such as being callable, allowing the issuer to redeem the shares at a predetermined price, or convertible, which permits holders to exchange them for a specified number of common shares. These additional terms are usually detailed in the stock’s offering documents. Investors often consider preferred stock if they prioritize a steady income stream and capital preservation over potential capital appreciation or voting influence.

Dividend Features of Preferred Stock

Preferred stock dividends are characterized by their fixed rate, which is a key attraction for investors seeking consistent income. This rate is typically established at the time of issuance and can be a set percentage of the stock’s par value or a fixed dollar amount per share. For instance, a preferred stock might be issued with a 5% dividend rate, meaning it pays 5% of its par value annually. This predictable payment structure contrasts with common stock dividends, which fluctuate based on company profitability.

A significant feature distinguishing preferred stock dividends is whether they are cumulative or non-cumulative. Cumulative preferred stock means that if a company misses a dividend payment, the unpaid dividend accumulates and must be paid to preferred stockholders before any dividends are distributed to common stockholders. For example, if a company misses two quarterly payments on cumulative preferred stock, it must pay all four quarters’ worth of dividends before common shareholders receive anything. Non-cumulative preferred stock does not accumulate missed dividends; if a payment is skipped, it is lost to the shareholder, and the company has no obligation to make it up later.

Another distinction lies in participating versus non-participating preferred stock. Participating preferred stock offers holders an additional dividend beyond their fixed rate under certain conditions. This extra payment often occurs if common stock dividends exceed a specified amount or if the company achieves certain profit targets. Non-participating preferred stock, which is more common, only receives its fixed dividend and does not share in any additional profits distributed to common shareholders.

Dividend Payment Mechanics

The process for preferred stock dividend payments begins with a formal declaration by the company’s board of directors. The board must authorize the dividend payment, determining the rate per share for preferred shareholders. This announcement, known as the declaration date, sets the stage for the upcoming distribution.

Following the declaration, a record date is established, which is the cut-off point for identifying eligible shareholders. Only those listed on the company’s books as stockholders by the record date will qualify for the payment. If preferred stock changes hands on or after the ex-dividend date, which typically precedes the record date by one or two business days, the buyer will not receive the upcoming dividend; instead, the seller will.

Finally, the payment date is when the declared dividend is distributed to eligible shareholders. Preferred stockholders hold priority over common stockholders. All preferred dividends, including any accumulated arrears for cumulative preferred stock, must be paid in full before common shareholders receive any distributions. While preferred dividends offer priority and often a fixed rate, they are not guaranteed; a company must declare them, and if financial difficulties arise, the board may choose not to declare or pay dividends.