- Learn Basic Accounting in Less than 1 Hour!
- Accounting Basics
- What are Accounting Principles
- Accounting Cycle
- Accrual Accounting Basis
- Cash Basis Accounting
- Matching Principle of Accounting
- Conservatism Principle of Accounting
- Cash Accounting
- What are Accounting Policies?
- Accounting Estimates
- Mark to Market Accounting
- Cash Accounting vs Accrual Accounting
- Operating Cycle
- Fiscal Year
- Fiscal Year vs Calendar Year | Top Differences | Examples |
- Financial Reporting
- Financial Statements
- Interim Financial Statements
- Consolidated Financial Statement
- Audited Financial Statements
- Accounting Scandals
- Quality of Earnings
- IFRS vs US GAAP
- IFRS vs Indian GAAP
- Accounting for Fair Value Hedges
- Debit vs Credit in Accounting
- Double Entry Accounting System
- Journal in Accounting
- Ledger in Accounting
- Journal vs Ledger
- What is Trial Balance ? | Examples | Steps | Prepare | Errors
- Reconciliation of Books | Types, Best Practices | Useful Tips
- Petty Cash | Meaning | Template | Accounting | Example
- Debit Note | Debit Notes Accounting & its Top Characteristics
- Credit Note
- Debit Note vs Credit Note | Top 7 Differences (Infographics)
- Balance Sheet
- Balance Sheet
- Accounting Equation
- Assets vs Liabilities | Top 9 Differences (with Infographics)
- Trial Balance vs Balance Sheet | Top 10 Differences You Must Know!
- Balance Sheet vs Consolidated Balance Sheet
- Bank vs Company Balance Sheet
- Commitments and Contingencies
- Management Discussion & Analysis
- Revenue Reserve vs Capital Reserve | Top 7 Differences
- Revenue Reserve
- Capital Reserve
- Capital Receipts vs Revenue Receipts | Top 8 Differences
- Capital Lease vs Operating Lease | Top Differences You Must Know!
- Debt vs Equity Financing | Advantages | Disadvantages | Example
- Internal vs External Financing | Top 7 Differences (Infographics)
- Available for Sale for securities
- Held to Maturity to securities
- Cash and Cash Equivalents | Examples, List & Top Differences
- Cash Equivalents
- Restricted Cash
- 3 Types of Inventory | Raw Material | WIP | Finished Goods
- Current Assets
- FIFO vs LIFO
- First In First Out (FIFO)
- Last in First Out (LIFO)
- LIFO Reserve
- Non-Current Assets
- Accounts Receivables? | Definition, Accounting Examples
- Accounts Receivables Factoring
- Allowance for Doubtful Accounts
- Accrued Revenue
- Liquid Assets
- Quick Assets
- Marketable Securities on the Balance Sheet | Top Examples
- Trading Securities in Balance Sheet
- Prepaid Expenses
- Tangible vs Intangible Assets
- Net Tangible Assets | Calculate Net Tangible Assets Per Share
- Tangible Assets
- Capital Expenditure (Capex)
- Salvage Value
- Residual Value
- Fixed Capital vs Working Capital | Top 8 Differences (Infographics)
- Impariment of Assets
- Negative Goodwill
- Accounts Payable | Days Payable Outstanding | Formula |
- Current Liabilities | List of Current Liabilities on Balance Sheet
- Accrued Liabilities
- Notes Payable
- Revolving Credit Facilities
- Bonds Payable Accounting
- Bad Debt Reserve Allowance
- Deferred Expenses
- Unearned Revenue (Sales)
- Deferred Revenue (Income)
- Current Portion of Long-Term Debt (CPLTD) | Balance Sheet
- Long-Term Debt in Balance Sheet
- Financial Liabilities | Definition, Types, Ratios, Examples
- Long-Term Liabilities
- Accounts Receivable vs Accounts Payable
- Minority Interest
- Accounting for Convertibles
- Accounting for Derivatives
- Financial Lease vs Operating Lease
- Off balance Sheet Financing
- Finance vs Lease
- Shareholders Equity
- Shareholders Equity Statement
- Negative Shareholders Equity
- Par Value of Stock
- Share Capital
- Outstanding Shares (Definition, Formula) | Stocks Outstanding
- Additional Paid-in Capital on Balance Sheet
- Retained Earnings (Formula, Examples) | How to Calculate?
- How to Calculate Net Worth of a Company | Formula | Top Examples
- Owners Equity
- Preferred Shares
- Weighted average Shares average outstanding
- Share Buyback
- Accelerated Share Repurchase
- Restricted Stocks Units (RSUs)
- Contingent Shares
- Stock Splits Share
- Treasury Stock Shares
- Dilutive Securities
- Anti Dilutive Securities
- Stock Dividend
- Cash Dividend
- Preferred Dividends
- Homemade Dividends
- Ex dividend date
- Date of Record of dividends
- Cost of preferred Stock
- Common Stock vs Preferred Stock | Top 8 Differences You Must Know
- Stocks Vs Shares
- Stock Options Vs RSU
- Shareholder Equity vs Net Worth | Top 5 Differences You Must Know!
- Stock vs Option
- Stock vs Mutual Funds
- Income Statement
- Income Statement | Top Examples | Template | Format | Analysis
- Cost of Goods Sold
- Direct Costs
- Indirect Costs
- Non Recurring Items
- EBIT vs EBITDA | Top Differences | Examples | Calculation
- Depreciation – Formula | Types | Most Comprehensive Guide
- EBITDA vs Operating Income
- Straight Line Depreciation Method
- Sum of Year Digits Method of Depreciation
- Declining Balance Method of Depreciation
- Amortization of Intangible Assets
- Unrealized Gains (Losses)
- Non Cash Expense
- Share based compensation
- Restructuring Cost
- Extraordinary Items
- Interest Income
- Double Taxation
- Net Loss
- Net Operating Loss (NOL)
- Tax Shield
- Sundry Expenses
- Interest vs Dividend | Top 9 Differences (with Infographics)
- EBITDA vs Net Income
- EBIT vs Net Income
- EBIT vs Operating Income
- Cost vs Expense
- Accounting Profit vs Economic Profit
- Income Tax vs Payroll Tax
- Tax credits vs Tax deductions
- Gross Income vs Net Income
- Profit vs Revenue
- Revenue vs Earnings
- Revenue vs Income
- Profit vs Income
- Revenue vs Sales
- Capitalization vs Expensing
- Income Statement vs Balance Sheet | Top 5 Differences You Must Know!
- Statement of Comprehensive Income | Items | Colgate Example
- FOB Destination
- Explicit Cost
- Implicit Cost
- Direct cost vs Indirect Cost
- Fixed cost vs Variable cost
- Nopat vs Net Income
- Marginal Costing vs Absorption Costing
- Cash Flow Statement
- Cash flow from Operations | Formula, Calculations & Examples
- Cash Flow from Investing Activities (Formula & Top Examples)
- Cash Flow From Financing Activities | Formula & Calculations
- Cash Flow Analysis
- Fund Flow Statement
- Direct vs Indirect Cash Flow Methods
- Cash flow vs Net Income | Key Differences & Top Examples
- Cash Flow vs Fund Flow | Top 8 Differences (with Infographics)
- Accounting Careers
- Accounting Interview Questions
- Financial Accounting Careers
- Top Accounting Firms
- Big Four Accounting Firms
- Forensic Accounting
- Cost Accounting
- Financial Accounting
- Accounting vs Engineering
- Finance vs Accounting
- Bookkeeping vs Accounting
- Accounting vs Auditing
- Bookkeepers vs Accountants
- Accounting vs Financial Management
- Cost Accounting vs Financial Accounting
- Cost Accounting vs Management Accounting
- Financial Accounting vs Management Accounting
- Public vs Private Accounting
- Accounting vs CPA
- Controller vs Comptroller
- Accounting Firms in Australia
- Accounting Firms in Canada
- Top Accounting Firms in US
- Accounting Books
Preferred Dividends Formula (Table of Contents)
- What is Preferred Dividends?
- Preferred Dividend Formula
- Preferred Dividend Calculator
- Preferred Dividend Template
What is Preferred Dividend?
Preferred Dividends is a fixed dividend received from Preferred stocks. It means that if you’re a preferred shareholder, you would get a fixed percentage of dividends every year. And the most beneficial part of the preferred stock is that the preferred shareholders get a higher rate of dividend. They are also given more preference than equity shareholders in terms of dividend payment.
source: Diana Shipping
WallStreetMojo Free Accounting Course
You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!
* Please provide your correct email id. Login details for this Free course will be emailed to you
Preference Dividends Formula
Here’s a simple formula for calculating preferred dividends on preferred stock –
If preferred shareholders want to invest in the preferred stocks, they need to look at the prospectus.
They need to see two basic things first.
- What is the par value of the stock?
- What is the rate of dividend?
Once they know these two basic things, they can simply multiply these two components and can understand how much they would receive at the end of each year.
The great advantage of investing in preferred stocks is that it is like a fixed instrument. You are assured of a fixed payment every year.
Plus, if the firm gets bankrupt any day, you will be given preference over equity shareholders. It means that if the company becomes bankrupt, before equity shareholders are paid a buck, you will get the amounts due to you.
Once you know how to calculate the preferred dividend per share, you would just need to multiply the number of shares with the preferred dividend per share. And you would know how much each year you would get each year.
Example of Preferred Dividend Formula
Let’s take a simple example and see how preferred dividend is calculated for preferred stockholders.
Urusula has invested in preferred stocks of a firm. As the prospectus says, she will get a preferred dividend of 8% of the par value of shares. The par value of each share is $100. Urusual has bought 1000 preferred stocks. How much-preferred dividend she will get every year?
The basic two things to calculate the preferred dividend are given. We know the rate of dividend and also the par value of each share.
By using the preferred dividends formula, we get –
- Preferred Dividends = Par value * Rate of Dividend * Number of Preferred Stocks
- = $100 * 0.08 * 1000 = $8000.
It means that every year, Urusula will get $8000 as preferred dividends.
Common features of preferred dividend
#1 – Higher dividend rates
- Preferred dividend rates are much higher than the rates of equity or common stock.
- The reason for this is because preference shareholders do not have ownership control over the company, hence to attract the investors, higher rates of dividends are offered to them.
#2 – Fixed percentage
- Unlike the dividend on common or equity stock which keeps on fluctuating every year depending on the profitability ratios of the company, preferred dividends do not fluctuate, their rate remains unchanged throughout the maturity life of preference share.
- There is also one other major reason for fluctuation of dividend on common stock.
- Dividend rates on common shares are recommended by the shareholders during the annual general meeting of the company.
- Hence it keeps on fluctuating since the shareholders decide rates keeping in mind the profitability and future outlook of the Company.
#3 – Cumulative or arrears in dividend
- One of the important features of the preferred dividends is that shareholders are entitled to a preferred dividend every year irrespective of the profitability of the Company.
- But sometimes, on account of business exigencies, a company may not be in a position to pay to shareholders.
- In such circumstances, dividends are accumulated and are paid in a subsequent year.
- Let’s understand the impact of one of the business exigencies on payment of preference dividend with the help of practical illustration.
Cumulative Preferred Dividend Example
Company X Inc. has 3 million outstanding 5% preferred shares as on December 31st 2016. Par value of preference shares are $10 each. Cash balance available with Company is $1 million.
Preference dividend to be paid for the year 2015 = 1,500,000 (3,000,000 *10*5)/100
Available cash balance =1,000,000
In the above case, it’s not possible for the company to pay a preferred dividend to shareholders since the total available cash is less than the total amount of preferred dividend liability. Since dividend are always paid in cash, its shortage will force the company to withhold the payments of dividend for the year 2016. In the above case, a dividend will get accumulated and must eventually be paid to preferred shareholders in a subsequent financial year.
Please note, that the above illustration highlights just one single business exigency. There are various other business exigencies which might force the company to withhold the payment of preferred dividend.
#4 – Legal obligations
- Preferred dividends, like interest on debts, create a legal obligation on the company. These are to be paid to shareholders in preference over any common stock dividend.
- The liability of the company to pay preferred dividends is unconditional and absolute.
- Various jurisdictions impose penalties in case company does not pay an outstanding preferred dividend.
- These penalties range from fine and imprisonment of directors to prohibition on the company to raise additional finances from the public, till the liabilities are paid out.
#5 – Preferred treatment
- Preferred dividend is paid out to shareholders in precedence over other types of dividends i.e. dividends are paid out to shareholders before common stock or equity dividends are issued.
- In case of liquidation of the company, the shareholders with preferred shares are entitled to be paid from company assets first.
- All this feature of the preferred dividend gives it the preferential treatment with respect to other types of dividends.
- The above features highlight some of the common features contained in the most of the preferred shares. In the corporate world, there are various types of preference shares.
- These may or may not have some of the above-mentioned features and may also contain some additional unique features.
- Now, let’s looks at the different types of preference shares that are issued by the company to raise capital in the primary and secondary market.
Use of Preferred Dividend Formula
Preferred stock pays a fixed percentage of dividends. That’s why we can call it perpetuity because the dividend payment is equal and paid for an infinite period of time. However, a firm can choose to skip the equal payment of preferred dividends to preferred shareholders. And the firm can choose to pay the dividends in arrears.
It means that a firm won’t pay a dividend each year. Rather the due amount of dividend would accumulate over the period of time. And then the firm will pay the accumulated preferred dividends to the preferred shareholders. This feature of arrear payment is only available with the cumulative preferred stock. And the firm is legally obligated to pay off the previous year’s preferred dividend before paying the current year’s dividend.
In the case of non-cumulative preferred stocks, this feature of arrear payment is not available.
Preferred Dividend Formula Calculator
You can use the following Preferred Dividend Ratio Calculator
|Preferred Dividends Formula =||Par Value x Rate of Dividend x Number of Preferred Stocks|
|0 x 0 x 0 =||0|
Preferred Dividend Formula in Excel (with Excel Template)
Let us now do the same example above in Excel. This is very simple. You need to provide the two inputs of Par value, Rate of Dividend and Number of Preferred Stocks.
You can easily calculate the ratio in the template provided.
You can download this Preferred Dividend template here – Preferred Dividend Excel template
Advantages of Preferred dividend
Some of the common advantages of the preferred dividend are highlighted below -:
- Higher dividend rate – This is one of the most important advantages of holding preference shares. Amongst all the debt instruments like bonds, commercial papers, Government treasury bills and etc., return received by an investor by holding a preference share is far greater than received through holding any other debts instrument. The reason is pretty obvious, since cost is directly related to return. Higher the cost of holding any instrument, higher is the return received through it and vice versa.
- Preferential treatment – As highlighted above, preferred shareholders have right to preferential treatment regarding dividends. In the event of liquidation of Company, the shareholders with preferred shares are entitled to be paid from company assets prior to Common stock shareholders.
- Assured minimum return – Preference shares have a fixed dividend rate, whereas on the other hand common stocks do not have a fixed dividend. Fixation of dividend rate in advance guarantees the minimum return to shareholders. Shareholders do not have to depend on the general economic conditions or the profitability of the company. In case the company suffers loss, dividend get accumulated for the subsequent year.
This has been a guide to what is Preferred Dividends, its formula, its features and advantages along with practical examples. Here we also provide you with Preferred Dividends Calculator with downloadable excel template.