How to Calculate Preferred Stock Dividends

Preferred stock offers investors a unique dividend structure distinct from common stock, providing a generally fixed income stream. These dividends represent a predetermined payment to shareholders, typically paid out before any dividends are distributed to common stockholders. This article explains the elements involved in calculating preferred stock dividends and walks through the calculation process for different types of preferred stock.

Key Elements for Preferred Stock Dividend Calculation

Calculating preferred stock dividends involves understanding several fundamental components. Each preferred stock share has a stated par value, which serves as the base for determining the dividend payment, rather than the market price. For example, a preferred stock might have a par value of $100 per share.

The dividend rate, expressed as a percentage of the par value, dictates the annual dividend payment per share. If a preferred stock has a 5% dividend rate and a $100 par value, it pays $5 per share annually. This rate is fixed at the time of issuance.

Preferred stock can be classified as either cumulative or non-cumulative, a distinction that impacts dividend calculations if payments are missed. Cumulative preferred stock requires all skipped or unpaid dividends from prior periods (dividend arrearages) to be paid before common stockholders receive distributions. Non-cumulative preferred stock does not accrue unpaid dividends; if a dividend is not declared or paid, that payment is simply foregone.

The total number of preferred shares outstanding determines the company’s total dividend obligation. Once the per-share dividend is calculated, multiplying it by the total number of shares provides the aggregate amount the company must pay. Companies often issue preferred stock in various series, each with potentially different par values and dividend rates.

Calculating Non-Cumulative Preferred Stock Dividends

Calculating dividends for non-cumulative preferred stock is straightforward because any missed payments do not carry forward. The annual dividend per share is determined by multiplying the preferred stock’s par value by its stated dividend rate. For instance, if a company issues non-cumulative preferred stock with a par value of $50 and a 6% dividend rate, the annual dividend per share is $3 ($50 multiplied by 0.06).

To determine the total annual dividend payment for all non-cumulative preferred shares, this per-share dividend is multiplied by the total number of outstanding shares. If the company has 10,000 shares of this non-cumulative preferred stock outstanding, the total annual dividend payment would be $30,000 ($3 per share multiplied by 10,000 shares). If a dividend is not declared or paid in a given period, that payment is simply foregone and does not need to be made up later.

Calculating Cumulative Preferred Stock Dividends

Cumulative preferred stock dividends require that any dividends not paid in previous periods must be settled before common shareholders receive distributions. When a company skips a preferred dividend payment, the unpaid amount accumulates as an arrearage. These arrearages represent a liability that the company must eventually clear.

To calculate the total dividend payment for cumulative preferred stock, first determine the annual dividend per share (par value multiplied by the dividend rate). For example, a cumulative preferred stock with a $100 par value and an 8% dividend rate results in an $8 annual dividend per share. If the company skipped dividends for the past two years, there would be an accumulated arrearage of $16 per share ($8 per year multiplied by 2 years).

When the company resumes dividend payments, it must pay both the accumulated arrearages and the current year’s dividend before common stockholders can receive anything. The total payment per share would be the $16 in arrearages plus the current year’s $8 dividend, totaling $24 per share. If the company has 5,000 shares of this cumulative preferred stock outstanding, the total dividend payment for that period would be $120,000 ($24 per share multiplied by 5,000 shares), covering all past and present obligations.

Practical Considerations for Preferred Stock Dividends

Companies may issue multiple series of preferred stock, each with its own distinct par value and dividend rate. When this occurs, dividend calculations must be performed separately for each series based on its specific terms. The aggregate dividend obligation is the sum of the payments due for all outstanding preferred stock series.

The payment of preferred stock dividends involves specific dates. The declaration date is when the company’s board formally announces its intention to pay a dividend. The record date identifies eligible shareholders, and the payment date is when the actual dividend funds are disbursed.

Companies might occasionally make partial dividend payments. In such cases, for cumulative preferred stock, only the portion of the dividend that was not paid will contribute to the accumulation of arrearages. For instance, if a cumulative preferred stock has an annual dividend of $10 and the company only pays $6, the remaining $4 per share will accumulate as an arrearage for that period.