2025 Guide: Current Dividend Preference Explained with Examples and Pricing Insights

Andy Smith, a Certified Financial Planner (CFP®), licensed realtor, and educator with over 35 years of experience, specializes in personal finance, corporate finance, and real estate. He has guided thousands towards financial success through expert advice and strategic planning.

Understanding Current Dividend Preference

Current dividend preference is a protective mechanism linked to preferred shares, granting these shareholders priority to receive dividend payments before any distributions are made to common shareholders. This priority ensures that dividends are first allocated to preferred shareholders, safeguarding their returns ahead of common stockholders.

Key Highlights

• Preferred shareholders receive dividends before common shareholders.
• Preferred shares typically lack voting rights but hold higher claim on dividends.
• Dividends on preferred stocks are fixed or floating, unlike the variable dividends of common stocks.

How Current Dividend Preference Works

Dividend payouts depend on factors such as the company’s earnings, retained profits, and payout policies. While common stock dividends fluctuate based on company discretion, preferred dividends offer greater consistency and reliability.

Common shareholders benefit from voting rights and potential capital gains through stock price appreciation. Conversely, preferred shareholders usually do not vote but enjoy steady dividend payments, blending characteristics of stocks and bonds.

Dividend Rates and Preferred Stocks

Preferred stock dividends are determined by a fixed or floating rate tied to specific benchmarks, providing stability compared to the variable dividends of common shares, which depend on company profits and board decisions.

Preferred dividends are generally more secure, with companies obligated to pay these dividends as long as they remain operational. Additionally, cumulative preferred shares require companies to pay any missed dividends before issuing dividends to common shareholders.

In the event of bankruptcy, preferred shareholders have priority over common shareholders in asset distribution, although bondholders are paid first.

Illustrative Example of Current Dividend Preference

Imagine The World’s Best Widget Co. with 4 million preferred shares at a $25 par value, offering a 5% dividend. The company also has 100 million common shares, paying $0.20 per share in dividends.

Preferred dividends amount to $5 million annually (0.05 x $25 x 4 million), while common dividends total $20 million (0.20 x 100 million shares).

During profitable periods, the company comfortably pays both dividends. However, in less profitable years, it may reduce or suspend common dividends, but preferred dividends must still be paid or accrued for future payment.

If bankruptcy occurs, after bondholders are paid, preferred shareholders receive any remaining assets before common shareholders.

Explore useful articles in Stocks as of 10-12-2020. The article titled " 2025 Guide: Current Dividend Preference Explained with Examples and Pricing Insights " offers in-depth analysis and practical advice in the Stocks field. Each article is carefully crafted by experts to provide maximum value to readers.

The " 2025 Guide: Current Dividend Preference Explained with Examples and Pricing Insights " article expands your knowledge in Stocks, keeps you informed about the latest developments, and helps you make well-informed decisions. Each article is based on unique content, ensuring originality and quality.