Preferred Dividend Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Preferred Dividend, written in plain English, along with examples of how it is used.

What is Preferred Dividend?

n.In a corporation priority given to group of shareholders of stocks in distribution of profits.

History and Meaning of Preferred Dividend

A preferred dividend is a distribution of profits made by a corporation to its preferred shareholders. Preferred shareholders are the first in line to receive a dividend payment, which is typically a fixed amount determined at the time of issuance. The preference of these shareholders means that they will receive dividends before common shareholders in case of the company's liquidation, and their dividends have to be fully paid before the corporation can pay dividends to common shareholders.

Preferred dividends are often used by corporations as an alternative to debt financing, as it can give them greater financial flexibility. Unlike debt, preferred dividends do not create an obligation to make regular payments and can be suspended in hard times. However, this flexibility comes at a cost, as preferred dividends are typically more expensive to investors than debt.

Examples of Preferred Dividend

  1. ABC Corporation announced a quarterly preferred dividend of $1.50 per share to its preferred stockholders, payable on March 15, 2021.

  2. The board of directors of XYZ Corporation declared a preferred dividend of $0.75 per share, which will be paid to holders of record on April 1, 2021.

  3. DEF Corporation will pay a total cash dividend of $500,000, of which $50,000 will go to its 1,000 preferred shareholders, who hold 10% of the company's outstanding shares.

Legal Terms Similar to Preferred Dividend

  1. Common Dividend: Common dividends are payments made by a corporation to its common shareholders after paying any preferred dividends. Common shareholders have no right to receive dividends in case of liquidation, and their dividend payments are not fixed.

  2. Cumulative Dividend: A cumulative dividend is a dividend that, if it is not paid in a given period, accumulates and must be paid before any dividend can be paid to common shareholders.

  3. Participating Preferred Stock: Participating preferred stock gives shareholders the right to receive additional dividends if the company exceeds a certain level of profitability.