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Preferred dividend

A preferred dividend is paid to holders of preferred shares of a company. This is usually paid before any dividend is paid to common shareholders.

Expanded Definition

In the order of claims upon the earnings and assets of a company, common shareholders -- that's usually you and me -- come dead last. But, we get voting rights and can unseat directors (if enough shares vote that way).

Holders of preferred shares come ahead in the hierarchy, but for the extra privileges their shares hold, they give up such things as voting rights. However, one of the things they gain can be -- and often is -- preferred dividends. These are dividends paid out of net income before any other dividends can be paid. The rate is often higher than common shareholder dividends, too. For instance, Warren Buffett recently bought preferred stock in General Electric that paid 10% (plus warrants). Yowza! GE's normal dividend is about 2% to 3%.

Dividends to common shareholders don't have to be paid and aren't, unless the board of directors declares a dividend. But preferred dividends must be paid. It's part of the set up for the preferred shares.

Sometimes, preferred dividends can also be deferred, that is paid later. This is good for the company in that if their net income isn't high enough to pay the dividend, they don't have to. But they owe that payment to the preferred shareholders, which is good for those guys. Other times, they are not deferred and all the preferred shareholders get to be is first in line for any dividends that are paid ... eventually.

In calculating return on equity, preferred dividends should be subtracted from net income so that the return to common shareholders is accurate.

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