When people talk about stocks of shares in a company, they are usually talking about common stocks. Common shares represent an ownership interest in the company and pay a dividend if the board decides the company has made enough profit and can afford it. Preferred stock is like a cross between common stock and a bond. This type of stock comes with a guaranteed dividend which the company must pay before the common stockholders receive a payout.
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Understanding Preferred Dividends
Preferred dividends are the cash that a company pays to the owners of its preferred shares. If you hold preferred stock, you can expect to receive these payments on a regular basis. That's because preferred shareholders get a guaranteed payment, and one at higher rates than common shareholders. That rate is fixed, which means you get a stable dividend payment each year. For example, you may own "8 percent preferred stock," which means you get a guaranteed fixed rate of 8 percent per share per year. Common shareholders, by contrast, don't know how much they're getting or whether they'll get anything at all until the board of directors decides.
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Conditions Are in the Prospectus
When you first bought preferred stock, you would have received the investor's prospectus. This document contains the key details you need to calculate the preferred dividend — specifically, the dividend rate and par value. The par value represents the price of the preferred stock at the time it was issued, and the dividend rate is your return on investment. For example, your stock may have a dividend rate of 8 percent and a par value of $100 per share. If you don't have this information, contact your broker or check a previous dividend statement. You'll also find the preferred stock rates displayed on the company's balance sheets. There's a lot of transparency around preferred stocks since most times, the company is legally obligated to pay the dividend.
Calculate the Preferred Dividend
It's easy to calculate the total annual preferred dividend: simply multiply the dividend rate by the par value. So, with a dividend rate of 8 percent and a par value of $100, your annual dividend would be $8 per share. If you own 100 shares, you're due a payment of $800. Most companies pay preferred dividends every quarter rather than annually. The amount of the quarterly dividend may vary, but you can get a good estimate by dividing the total annual payment by four. In this example, you'd receive $2 per share per quarter, or $200 in total.
When Payments Are Postponed
Sometimes, a company will decide to skip preferred dividends for one or more quarters. What happens next depends on whether you hold cumulative or non-cumulative preferred stock. With cumulative stock, the company must put your guaranteed payment into a special arrears account and note in its books that it owes you money. By law, the company has to pay the arrears before it can make any dividend payments to common stockholders. You'll typically receive the arrears alongside your current preferred payment the next time a dividend is due. Alternatively, you'll receive it as a lump sum if the company winds up in liquidation. With non-cumulative stock, you lose the money. Non-cumulative means that you're entitled to a dividend only if the board chooses to pay one.