Preferred dividends
Also known as: preferred stock dividends
Preferred dividends are the fixed dividend payments made to preferred stockholders, calculated as the stated dividend rate multiplied by the stock's par value. They must be paid before any dividends go to common stockholders.
Preferred dividends are the payments a corporation makes to holders of its preferred stock. Unlike common stock dividends, which rise and fall at the board's discretion, preferred dividends are fixed: the stock carries a stated dividend rate applied to its par value. Preferred stockholders get their name from this priority — they must receive their dividends before common stockholders receive anything.
The calculation is dividend rate × par value. Most preferred stock has a $100 par value, so a 6% preferred pays $6.00 per share annually, typically distributed quarterly at $1.50 per share. If the stock instead quotes its payment directly (for example, a "$4.50 preferred"), that dollar amount is the annual dividend per share.
Several features affect how preferred dividends behave. Cumulative preferred accumulates any skipped dividends as arrears, and all arrears plus the current dividend must be paid before common stockholders receive a dime; non-cumulative preferred loses skipped payments forever. Participating preferred can receive extra dividends beyond the stated rate in profitable years. Because the payment stream is fixed, preferred stock trades much like a bond — its market price falls when interest rates rise, and its current yield is the annual dividend divided by the market price.
Preferred dividends are tested on the SIE, Series 65, and Series 6 exams. Know how to compute the annual and quarterly dividend from a rate and par value, how cumulative arrears work, and why preferred stock appeals to income-focused investors.
Key takeaways
- Preferred dividends are fixed payments equal to the stated rate times par value — a 6% preferred with $100 par pays $6 per year.
- Preferred stockholders must be paid their dividends before common stockholders receive any.
- Cumulative preferred accrues missed dividends as arrears that must be paid before common dividends resume.
- Because the dividend is fixed, preferred stock prices are sensitive to interest rates, like bonds.
- The SIE, Series 65, and Series 6 exams test preferred dividend calculations and features.