How to Get Preferred Dividends and What They Are

Preferred dividends are income distributed to investors holding preferred stock. They distinguish preferred from common stock, offering a predictable income stream. Understanding preferred dividends and how to obtain them can be valuable for investors seeking regular payouts and stability.

Understanding Preferred Stock and Dividends

Preferred stock combines characteristics of both equity and debt. Companies issue preferred stock to raise capital, committing to regular dividend payments to investors. Unlike common stock, which represents ownership with voting rights and fluctuating dividends, preferred stock typically does not carry voting rights but offers a fixed dividend rate. This rate is usually a percentage of the stock’s par value, paid at specific intervals, often quarterly.

Preferred shareholders have priority in receiving dividends. Preferred dividends must be paid before any common stock dividends. This priority extends to liquidation, where preferred shareholders have a higher claim on assets than common shareholders, though they rank below bondholders and other creditors. This structure provides preferred stock investors with a more secure income stream.

Fixed preferred dividends offer a stable income source, unlike variable common stock dividends that fluctuate with company performance. While preferred stock generally offers higher dividend rates than the common stock of the same company, its value is more closely tied to interest rates rather than significant capital appreciation. This makes preferred stock appealing to investors focused on steady income rather than aggressive growth.

Key Features of Preferred Stock

Preferred stock has features influencing its dividends. A primary distinction lies between cumulative and non-cumulative preferred stock. With cumulative preferred stock, if a company misses a dividend payment, all missed dividends accumulate and must be paid to cumulative preferred shareholders before any common stock dividends are distributed. This provides security for income-focused investors, ensuring missed payments are recovered.

Conversely, non-cumulative preferred stock does not accumulate missed dividends. If the company skips a dividend payment for non-cumulative shares, those dividends are lost. The company cannot pay common shareholders dividends in the same period it skips a non-cumulative preferred dividend; missed payments do not carry forward. This difference significantly impacts the reliability of dividend income.

Callable preferred stock allows the issuing company to repurchase shares at a predetermined price after a specified date. Companies might exercise this option if interest rates decline, reissuing new shares at a lower dividend rate to reduce costs. For investors, callable preferred stock often offers higher initial yields to compensate for this call risk, but it means their dividend stream could cease earlier than anticipated.

Convertible preferred stock offers investors the option to convert their preferred shares into a predetermined number of common shares. This provides potential for capital appreciation if common stock performs well, allowing investors to benefit from equity growth while enjoying fixed dividends. Due to this conversion potential, convertible preferred stock typically offers lower dividend rates compared to non-convertible preferred stock.

Investing in Preferred Stock

Acquiring preferred stock typically begins with establishing a brokerage account. Investors can open an account with online brokerage firms that provide platforms for trading securities. The process usually involves an application, identity verification, and funding, similar to setting up a common stock trading account.

Once a brokerage account is established, investors can identify preferred stock issues through the brokerage platform, financial news websites, or stock screening tools. Preferred stocks are listed on major exchanges and found by ticker symbols, sometimes with suffixes like “PR” or “PRA” denoting preferred status. Researching the credit ratings of preferred stock, similar to bonds, can help assess their risk profile.

Preferred stock can be acquired as individual shares directly from the market, similar to common stock purchases. For investors seeking diversification, preferred stock Exchange-Traded Funds (ETFs) or mutual funds offer an alternative. These funds hold a portfolio of preferred stocks, providing exposure to multiple issuers and industries, mitigating the risk of investing in a single company’s preferred shares.

After identifying suitable preferred stock or a preferred stock fund, investors can place a buy order through their brokerage account. This involves specifying the ticker symbol, the number of shares or fund units, and the order type (e.g., market order or limit order). Monitoring the stock’s performance and the issuing company’s financial health is beneficial, as these factors influence dividend reliability.

Dividend Payment and Tax Considerations

Receiving preferred dividends involves understanding key dates in the payment cycle. The declaration date is when a company’s board announces its intention to pay a dividend, specifying the amount and record date. Following this is the ex-dividend date, which is typically two business days before the record date. To receive the dividend, an investor must purchase the stock before the ex-dividend date.

The record date is when an investor must be officially registered as a shareholder to be eligible for the dividend. The payment date is when the declared dividend is disbursed to eligible shareholders. Dividends are typically paid directly into the investor’s brokerage account as cash. Some brokerage firms offer dividend reinvestment plans (DRIPs), allowing dividends to automatically purchase more shares of the same stock or fund.

For tax purposes, preferred dividends are often considered “qualified dividends” under federal tax law. Qualified dividends typically benefit from lower long-term capital gains tax rates, which can be 0%, 15%, or 20%, depending on the individual’s taxable income. To qualify, the stock must be held for a specific holding period, generally more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

However, not all preferred dividends are qualified. Dividends from certain preferred stock, like those from some foreign corporations or trust preferred securities, may be taxed as ordinary income, subject to higher rates. Investors should consult their brokerage statements or a tax professional to determine the tax classification of their preferred dividends, as state tax laws also apply. Holding preferred stock in tax-advantaged accounts, such as IRAs or 401(k) plans, can defer or eliminate taxes on dividends until withdrawal.