Glossary - Preferred Dividend
Preferred dividends are payments made by a corporation to its preferred shareholders before any dividends are paid to common shareholders. These payments are typically fixed and are made from the company's profits. Preferred dividends must be paid in full before any dividends can be issued to common stockholders, making them more secure in cases of financial distress but often at the cost of higher equity.
Also known as
- Preferred Share Dividends
- Preferred Stock Dividends
Use cases examples
- Company Charter: The Corporation shall pay a quarterly preferred dividend at the rate of 5% per annum to holders of the Preferred Series A Stock before any dividends are paid to holders of Common Stock.
- Investment Agreement: Pursuant to the terms set forth herein, dividends on Preferred Shares shall accrue and be cumulative, payable when, as, and if declared by the Board of Directors, out of legally available funds.
Considerations for investors
- Assessing the company's ability to generate enough profit to cover preferred dividends, thus protecting their investments.
- Considering the priority of preferred dividends over common dividends as a risk management strategy.
Considerations for founders
- Understanding the implications of issuing preferred shares with dividends on the company's cash flow and profitability.
- Negotiating dividend rates and terms that are sustainable for the company while attractive to investors.
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