What is Preferred Dividend?
289 reads · Last updated: December 5, 2024
A preferred dividend is a dividend that is allocated to and paid on a company's preferred shares. If a company is unable to pay all dividends, claims to preferred dividends take precedence over claims to dividends that are paid on common shares.
Definition
A preferred stock dividend refers to the dividend distributed to and paid to the holders of a company's preferred stock. If a company is unable to pay all dividends, the claim for preferred stock dividends takes precedence over the claim for common stock dividends.
Origin
The concept of preferred stock originated in the 19th century as companies sought ways to raise capital without diluting the equity of common shareholders. The priority of preferred stock dividends made them an attractive option for investors seeking stable income in uncertain economic environments.
Categories and Features
Preferred stocks can be categorized into cumulative and non-cumulative preferred stocks. Cumulative preferred stocks allow unpaid dividends to accumulate for future payment, whereas non-cumulative preferred stocks do not have this feature. Preferred stock dividends are typically fixed, providing a relatively stable income source, but shareholders usually do not have voting rights.
Case Studies
During the 2008 financial crisis, Bank of America issued preferred stock to raise capital. The fixed payment of preferred stock dividends attracted many investors seeking stable returns. Another example is General Electric, which utilized preferred stock during its restructuring to stabilize its financial situation, ensuring preferred shareholders received dividends before the company's profitability was restored.
Common Issues
Investors often misunderstand the fixed nature of preferred stock dividends, assuming they are low-risk. However, preferred stock dividends are not guaranteed, especially during financial difficulties. Additionally, preferred shareholders typically lack voting rights, which may limit their influence on company decisions.
