Finding Preferred Dividends

How To Find Preferred Dividends

Preferred dividends are payments made by a corporation to its preferred shareholders. These dividends are typically fixed and are paid out before common stock dividends. Companies with preferred shares make these payments because preferred stock is a type of equity that blends both the characteristics of a bond and a stock. Understanding preferred dividends is crucial for investors who aim to incorporate preferred stocks into their portfolios. This guide will show you how to find and calculate preferred dividends.

Understanding Preferred Shares

Preferred shares carry certain advantages and characteristics:

• Priority Payments: Preferred shareholders are given priority over common shareholders when it comes to dividend payments. This means dividends must be paid to preferred shareholders before any can be issued to common shareholders.

• Fixed Dividend Rate: Preferred shares often come with a predetermined dividend rate. This rate is either a percentage of the par value or a fixed amount stated in the issuing company's charter.

• Cumulative Dividends: Many preferred shares offer cumulative dividends, meaning if a company skips a dividend payment, it must make up for it in the future before any dividends can be paid to common shareholders.

How To Find Preferred Dividends

Step 1: Determine the Dividend Rate

The dividend rate of preferred shares can be found in the company’s financial documents, such as the annual report or the company’s prospectus issued at the time of the preferred stock offering.

• Example: If a company issues preferred shares with a dividend rate of 6% and a par value of $100, then each share pays $6 per year in dividends.

Step 2: Identify the Number of Outstanding Preferred Shares

Understanding how many preferred shares are outstanding is essential. This information can generally be found in the company’s balance sheet or financial notes section in the annual report.

• Example: A company has 1 million preferred shares outstanding.

Step 3: Calculate Total Preferred Dividends

To calculate the total preferred dividends a company must distribute, multiply the dividend per share by the number of preferred shares outstanding.

Calculation Example:

• Dividend Per Share: $6 (from Step 1)
• Outstanding Shares: 1,000,000 (from Step 2)

Total Preferred Dividends = Dividend Per Share x Outstanding Shares
= $6 x 1,000,000
= $6,000,000

Thus, the company pays $6 million annual preferred dividends.

Step 4: Verify with the Financial Statements

It's good practice to cross-check the calculated figures with the numbers reported in the company’s latest financial statements, such as the statement of shareholders' equity or dividend details in the notes to the financial statements.

Types of Preferred Shares and Dividend Calculations

Convertible Preferred Shares

These shares can be converted into a predetermined number of common shares. The dividend calculation is similar, but investors often factor in the potential conversion for equity appreciation.

Participating Preferred Shares

Beyond the fixed dividends, these shares may have provisions to participate in additional profits. The company’s charter will outline the calculation for any additional participation dividends.

Adjustable-rate Preferred Shares

Unlike traditional fixed-rate preferreds, these shares have dividends that adjust periodically based on prevailing interest rates. Investors should consult the terms outlined in the prospectus or annual reports for the adjustment mechanisms.

Why Preferred Dividends Matter

Preferred dividends impact both companies and investors significantly:

• For Companies: They represent a fixed financial obligation that can affect cash flow, especially during financial downturns.

• For Investors: Preferred dividends are often considered less risky than common dividends, providing a steady income stream. They are especially appealing in a low-interest-rate environment.

Example from the Field

When studying investment opportunities, look at company X, a utility company. Utility companies often issue preferred shares because they provide predictable cash flow, making the payment of dividends more manageable. Suppose company X has preferred shares with a 5% dividend rate, a $50 par value, and 500,000 shares outstanding.

• Dividend Per Share: 5% of $50 = $2.50

Total Annual Preferred Dividends = $2.50 x 500,000 = $1,250,000

Here, preferred dividends are calculated at $1.25 million yearly.

FAQs on Preferred Dividends

What happens if a company can't pay preferred dividends?

• If a company can't pay the dividends, for cumulative preferred shares, the unpaid dividends accrue and must be paid out before any common dividends. For non-cumulative, the company isn't obligated to pay missed dividends in the future.

How are preferred dividends taxed?

• The taxation depends on the country and its tax policies. In many jurisdictions, qualified preferred dividends might be taxed at a lower rate than ordinary income. Always consult a tax professional for guidance.

Can a company decide not to pay preferred dividends?

• While companies may choose not to declare dividends, they must uphold the fixed dividend obligation for cumulative preferred shares before resuming common dividend payments.

Conclusion

Preferred dividends offer a reliable income stream for investors who value stability and reduced volatility. By understanding how to calculate and find these dividends, investors can make informed decisions when diversifying their portfolios with preferred stocks. Utilize financial statements, annual reports, and prospectus documents to gather the required information, and always stay informed about the types of preferred shares available to understand your potential income better.

For more questions about investing in preferred shares or other investment options, consider looking into our related articles to expand your knowledge and make educated financial decisions.