Preferred stock dividend

A preferred stock dividend is a payment made to the holders of an issuing entity's preferred shares. This dividend is typically cumulative, so if the issuer does not make a scheduled dividend payment, all unpaid dividends continue to be payable. If a scheduled dividend is past due for payment, it is considered to be in arrears.

If a preferred stock dividend is not cumulative, then if the issuing company elects not to pay it, the dividend is permanently lost to the investor, and is said to have passed. Given the large cash flow advantage of the cumulative dividend feature, preferred stock with this feature tends to be priced higher than preferred stock that is not cumulative.

A variation on the basic preferred stock dividend is the participating feature. If the issuing company offers participating preferred stock, this means that holders of the stock will also be paid a dividend if the company meets certain performance goals (such as exceeding a certain profit or cash flow level).

There is usually a requirement for preferred stock dividends to be paid before any dividends are paid to the holders of the company's common stock. The same payment preference arises when the issuing company is in liquidation.

The dividend preference feature does not guarantee that the holder of preferred stock will receive a dividend, only that the dividend must be paid before the business can pay certain other claims.

The ability to delay dividends makes preferred stock more attractive to those businesses that have unpredictable cash flows that might give them trouble in paying more rigorously scheduled dividend payments.