Key Takeaways
- Regular Payouts: Preferred dividends are those doled out to the aristocrats of stockholders – those holding preferred shares.
- Higher Security: Preferred stock usually snags higher dividend rates than common stock from the same company, dressing up its attractiveness.
- Commitment: Dividends for preferred stocks are determined beforehand, making them a promise that the company strives to keep, come rain or high-water expenses.
- Priority: In the pecking order of dividends, preferreds get the first seat at the dining table, i.e., they are paid before common stock dividends.
Understanding Preferred Dividends
Think of preferred dividends as the VIP pass at a concert – they get certain perks and privileges that regular tickets don’t. These dividends are determined and declared by the lords of the board (the company’s board of directors) and are usually a fixed amount, providing a sense of financial stability and predictability which can be quite comforting in the volatile world of investments.
Calculating the Royal Share
Calculating preferred dividends involves some straightforward mathematics. If you know the par value of the share and the agreed-upon dividend rate, you’re mostly there. It’s like promising a slice of pie; the size of the slice is fixed, even if the size of the pie changes.
Dividends in Arrears: A Royal Debt
Not all those who wear crowns can keep their palaces in order - sometimes, dividends on preferred shares can accumulate if not paid. These are known as dividends in arrears, a fancy term meaning “debt that needs to be cleared.” Before common shareholders can see a dime in dividends, these arrears need to be settled, giving a whole new meaning to “first come, first served.”
Not Just Another Stock
Preferred stock is no run-of-the-mill stock. Aside from often delivering juicier dividend rates, these shares come with terms that might include “callable,” which allows the company to buy back shares under specific conditions, or “convertible,” which lets investors swap their preferred shares for common shares, presumably getting a different kind of VIP treatment.
Related Terms
- Common Stock: The everyman’s equity. Does not enjoy the safety net of fixed dividends but has the pleasure of voting in company decisions.
- Par Value: The face value of a stock; crucial in calculating dividends for preferred shares.
- Cumulative Preferred Stock: These shares ensure that if dividends are skipped, they’re not forgotten; they accumulate.
- Non-Cumulative Preferred Stock: For those who live in the financial equivalent of ’no strings attached.’ Missed dividends are missed forever.
Further Reading
- “The Intelligent Investor” by Benjamin Graham - Enhance your understanding of different stock types and investment strategies.
- “Common Stocks and Uncommon Profits” by Philip Fisher - Delve into the world of stocks and how dividends play into long-term investment gains.
By keeping these points in mind, investors can navigate the seas of stock dividends with the grace of a seasoned captain, making preferred dividends a treasure worth considering in the vast ocean of investment opportunities.
