Preferred shares of stock represent a hybrid between debt and equity. The shares typically have no voting rights but are promised a certain dividend each year that must be paid prior to common shareholders receiving a dividend. In addition, if the company goes out of business, the preferred shareholders get paid from the company’s remaining assets prior to any common shareholders receiving anything. Knowing how to calculate the annual dividend paid on preferred shares allows you to figure out how much you’ll be earning each dividend payment.
Preferred Share Annual Dividend Formula
Every preferred stock has a par value and a dividend rate. The preferred share dividend formula only incorporates the par value of the preferred shares, regardless of what you paid for the stock. To find the annual dividend, multiply the par value by the dividend rate. For example, if the preferred shares have a par value of $50 and a dividend rate of 6 percent, multiply $50 by 0.06 to find that the preferred share pays a $3 annual dividend.
Dividend Payment Formula
To calculate how much you’ll receive on any particular dividend payment, you need to also know how often the preferred shares pay dividends each year and how many shares you own. First, divide the annual dividend payment by the number of payments per year to find the amount of the periodic dividend payment per preferred share you own. Second, multiply the periodic dividend payment by the number of shares you own.
For example, say you have 100 shares of a preferred stock that pays a $3 annual dividend but pays quarterly dividends. First, divide $3 by 4 to find that the quarterly dividend is $0.75 per quarter. Then, multiply $0.75 by 100 to find that you’ll receive $75 in dividend payments each quarter.
Advantages of Preferred Shares
Preferred share dividends aren’t guaranteed to be paid, but they do have to be paid before dividends are paid for common shares. For example, if a company doesn’t have enough money to pay the full amount of the preferred share dividends, then the company cannot pay dividends to common shareholders.
In addition, preferred shares can be either cumulative or noncumulative. With a cumulative preferred share, any dividends that weren’t paid for prior periods must be paid before any future dividends can be paid to common shareholders. For noncumulative preferred shares, dividend payments missed in the past don’t affect future dividends. For example, say a company misses its $2 per year dividend payment on its preferred shares. If the preferred shares are cumulative, the next year the preferred shares must receive $4 before the common shares can receive any dividends. If the preferred shares are noncumulative, the preferred shares only need to receive $2 in dividends prior to the company paying a dividend to common shareholders.
- A company might split up a preferred stock’s annual dividend into quarterly or semiannual payments.
- If you can’t find a preferred stock’s price and yield on a financial website, check with your broker.
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