When investing in a company, shareholders can choose between common and preferred stocks. One key advantage of preferred stocks is the payment of preferred dividends, which offer investors a steady stream of income. In this article, we will explain how to calculate preferred dividends and delve into their benefits for investors.

What are Preferred Dividends?

Preferred dividends are cash payments distributed to owners of preferred stock on a regular basis, often quarterly or annually. These dividends are prioritized over common stock dividends, meaning preferred shareholders are paid first. Companies may suspend the payment of common stock dividends in financial hardship without affecting preferred dividend payments.

How to Calculate Preferred Dividends

There are two primary methods companies use to determine the preferred dividend rate: fixed-rate and adjustable-rate. Below, we explain both.

1. Fixed-Rate Preferred Dividends

When a company issues fixed-rate preferred stock, it specifies a predetermined percentage that represents the annual dividend rate per share. To calculate fixed-rate preferred dividends:

1. Locate the fixed percentage rate indicated on your preferred stock certificate or in your broker’s records.

2. Determine the par value, also indicated on your stock certificate or available from your broker.

3. Multiply the par value by the fixed dividend rate.

4. Divide the result by 4 (for quarterly payments) or 12 (for monthly payments).

5. Multiply by the number of shares you own

Formula: (Dividend Rate x Par Value)/Periods * Number of Shares

For example, if you own 100 shares of a company’s fixed-rate preferred stock with a 5% annual dividend rate and a $100 par value, you would receive: (0.05 x $100)/4 * 100 = $125 per quarter.

2. Adjustable-Rate Preferred Dividends

Companies can also issue adjustable-rate preferred stocks, which means that corporate management can change the preferred dividend rate based on different criteria, usually benchmark index rates. To calculate adjustable-rate preferred dividends:

1. Identify the reference index rate—often U.S. Treasury rates or LIBOR.

2. Determine the stock’s spread, which is a premium added to the benchmark index rate and adjusts a dividend higher than the reference rate.

3. Add the spread to the reference index rate.

4. Multiply the resulting adjusted index rate by the par value.

5. Divide by 4 (for quarterly payments) or 12 (for monthly payments).

6. Multiply by the number of shares you own.

Formula: ((Reference Rate + Spread) x Par Value)/Periods * Number of Shares

Benefits of Preferred Dividends

Preferred dividends offer investors several advantages, including:

1. Higher Priority: Preferred shareholders receive dividends before common shareholders, ensuring a more stable and predictable income stream.

2. Accumulation of Unpaid Dividends: If a company skips any preferred dividend payments, these are accumulated and must be paid to preferred shareholders before any common stock dividends are distributed.

3. Regular Income: Fixed-rate preferred stocks provide investors with a steady source of cash flow.

In conclusion, calculating preferred dividends is essential for investors seeking stable investment returns with priority over common stock dividends. Understanding how to calculate both fixed-rate and adjustable-rate preferred dividends can help investors make informed decisions about their investment portfolios and maximize their returns on their investments in preferred stocks.