While looking for investments that pay a higher yield, you may have discovered -- or even invested in -- preferred stock shares. The typical preferred share issue pays a fixed dividend every quarter. Depending on the share price of the preferred stock, that dividend rate can produce a very attractive yield. Only under drastic circumstances would a company not pay the dividend on a preferred share issue.
Preferred Gets the Preference
Preferred stock get its name because it has preference over common stock. Preferred stock shareholders must be paid a dividend before common stock shareholders receive a dividend. This means a company cannot pay a common stock dividend and then not pay a preferred stock dividend. If the company went bankrupt, the preferred stock shareholders would also be ahead of common stock shareholders when it came time to divide up assets in bankruptcy court.
Preferred Shares in the Middle
Although preferred stock investors are ahead of holders of common stock concerning the payment of dividends, they come after the company's bond holders if there is not enough money to cover the company's obligations. The subordinate position of preferred shares to bonds is one reason why the preferred shares of a company usually pay a higher yield than the company's bond issues. If a company is short on cash, it is possible that bond owners will receive interest payments while preferred and common stock share owners do not receive any dividends.
Cumulative Preferred Share
One feature that may be included in a preferred share issue is that any missed dividends are cumulative. With cumulative preferred shares all missed dividends on the cumulative preferred must be paid before any dividend is paid on the common shares. If the preferred is not cumulative, the company may elect to not pay both the preferred and common stock dividends for one quarter or more and then restart paying dividends with a regular a dividend payment to the preferred and a dividend payment to common shareholders.
Financial Stability of Company
If your preferred shares are from a company in good financial condition, the preferred share dividends will be paid on time. The dividend rate for preferred stock is fixed. This is in contrast to common share dividends, which can fluctuate depending on how much profit the company's board of directors decides to pay out as a dividend. Compared to common stock dividends, preferred share dividends are more stable and have a higher probability of being paid.
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