Does a Preferred Dividend Have to Be Paid?

by Erika Johansen

Preferred dividends are the regular payments expected by the holders of preferred shares in a company. While preferred shareholders generally have precedence over common shareholders when it comes to receiving dividends, they do not have an absolute guarantee of dividends paid regularly. Those with questions about their rights as holders of a specific company's preferred shares should seek legal advice.

Preferred Shares

Preferred shares in a company carry different rights from common shares. Preferred shareholders typically don't have the right to vote on composition of the board or other company matters. The reason their shares are termed "preferred" is that they do have the right to fixed dividend payments even when there's not enough profit to declare dividends for common shareholders. In an ideal world, these payments are supposed to come regularly. Preferred shareholders also get paid before the common shareholders in the event of corporate bankruptcy.

Declaration of Dividends

For any shareholder to receive dividends, the board of directors of the company must first declare dividends. In a typical corporation, boards have the discretion to decide, based on the company's performance and financials, whether dividends should be declared. If the board does declare a certain sum for dividends, the preferred shareholders are entitled to receive their share of dividends before any of the common shareholders' dividends are paid. However, the board of directors may also decide not to declare dividends, and if they don't, the preferred shareholders will not receive any dividend. In most companies, should the failure to declare dividends go on for a specified amount of time, the preferred shareholders may receive the right to vote on new directors.

Cumulative Preferred Shares

Depending on a company's articles and bylaws, the company may offer what are known as "cumulative" preferred shares. In a non-cumulative situation, if the board decides to declare dividends, the preferred shareholders have priority over common shareholders only for the money owed for that particular declaration, and if the board decides not to declare dividends, the preferred shareholder may never receive his dividends for that period. But if preferred shares are cumulative, the preferred shareholders will have the right to be repaid for all of their back-owed dividends before common shareholders get paid at all.

Other Preferred Classes

In addition to cumulative preferred shares, a company may create many other classes of preferred stock, each with different rules and rights attached. Prior preferred stock is a class of shares which, even if only very limited assets are available for dividends, has the right to payment even before the rest of the classes of preferred shares. Another class, preference preferred shares, will have the second level of priority over other preferred. "Participating preferred shares" may carry the right to additional dividends upon the happening of some specific event or achievement of some goal, regardless of the company's overall financial performance.


Photo Credits

  • Digital Vision./Digital Vision/Getty Images