Current Dividend Preference

What is Current Dividend Preference?

Current dividend preference is a safety feature of preferred shares, by which holders of such shares are qualified for receive dividends before common shareholders. Current dividend preference means that preferred shareholders have priority or preference over common shareholders with regards to dividend distributions. This feature infers that by no means might dividends at any point be paid to common shareholders before preferred shareholders.

Grasping Current Dividend Preference

Dividend distributions rely upon a number of factors, for example, the company's operating performance, level of retained earnings, and payout ratio. While dividend payments on common shares are generally at the company's circumspection, preferred dividends generally have a greater degree of stability.

Common shareholders have voting rights and get to take part in the growth of the company through common share price changes. Preferred shareholders typically don't have voting rights and are paid a fixed or floating dividend rate. The rate influences the price at which the preferred shares trade, making them a combination of both a stock and a bond.

Dividend Rate and Preferred Stock

The dividend rate for a preferred stock is a fixed or floating amount based a foreordained measurement. This makes them dissimilar to common share dividends, which could change relying upon a company's profits still up in the air by the company's board of directors.

Generally talking, preferred share dividends are seen as more stable than common stock dividends, and have a higher likelihood of being paid, given that preferred stockholders are paid their full set dividend rate every period as long as the company is in operation.

One feature that frequently accompanies the current dividend preference is a cumulative preferred shares function, where all missed (cumulative) dividends on preferred shares must be paid before any dividends can be issued to common stock shareholders.

One more advantage delighted in by preferred shareholders emerges on the off chance that the company becomes wiped out and accordingly petitions for bankruptcy. In this case, preferred stock shareholders stand ahead of common stock shareholders should a bankruptcy court split a company's assets. In any case, preferred shareholders rank behind bond holders, so bond holders get compensated before preferred shareholders.

Illustration of Current Dividend Preference

Consider a company called The World's Best Widget Co., which has 4,000,000 preferred shares with a face value of $25 outstanding. These shares have a stipulated dividend of 5%.

The World's Best Widget Co. likewise has 100 million common shares outstanding, on which it has been paying dividends of $0.20.

This means that the company pays out $5 million in preferred dividends (0.05 x $25 x 4 million preferred shares) and $20 million in common share dividends (0.2 x 100 million common shares).

On the off chance that the company has a solid financial position and is consistently productive, paying these dividends shouldn't cause it any issues. Nonetheless, on the off chance that it has a couple of unfruitful or insignificantly beneficial years, it might consider managing dividends on its common stock, or even suspending them out and out. In any case, even in this scenario, it must pay out preferred share dividends, either during this period or sometime in the future.

On the off chance that the company enters bankruptcy procedures, preferred shareholders will be paid out any capital left over ahead of common shareholders. Bond holders are paid first, then preferred shareholders, then common shareholders.

Features

• Preferred shareholders have a higher ranking (than common share holders) in terms of getting money owed to them, however they don't ordinarily have voting rights.
• Current dividend preference means preferred shareholders are qualified for receive dividends before common shareholders.
• The dividend rate for a preferred stock is a set amount, not at all like common share dividends which could vacillate.