Do Companies Pay Dividends to Preferred Stocks Regularly?

The payment of dividends to preferred stocks is not automatic and varies based on the specific terms attached to the shares. It also depends on several factors, including available profits, the discretion of the company’s board, and the type of preferred stock in question.

The Variable Nature of Dividend Payments

Firstly, it is important to note that not all companies pay dividends to preferred stocks on a regular basis. The exact rights attached to the shares will determine the payment, and if there are no distributable earnings, no dividend can be paid. Dividends, which are typically paid at the discretion of the board of directors, are not guaranteed for preferred stocks.

Types of Preferred Shares and Their Dividend Policies

There are several types of preferred shares, each with different dividend policies. For example, cumulative preferred shares require any missed dividends to be paid before any dividends can be issued to common shareholders. This ensures that preferred shareholders are prioritized in dividend payments. Some cumulative preferred shares are also convertible, allowing shareholders to convert their shares into ordinary shares or loan stock if dividends are missed for a number of years.

Usage of Preferred Stocks in Different Companies

Preferred stocks are used in different ways depending on the company. For established companies, preferred stocks often pay a higher dividend than common stocks. However, banks frequently issue "Trust Preferred" shares as part of their capital structure. Small, pre-revenue biotech companies sometimes offer convertible preferred stocks that do not pay dividends, as these instruments differ from the typical preferred stocks.

The Dual Role of Preferred Shares

Preferred shares serve a dual purpose: they act as both a bond and a stock. Investors purchase preferred shares primarily for the predictable fixed interest payment, known as the “Preferred Dividend.” This dividend must be paid every quarter, regardless of the company’s profitability. However, unlike bonds, the company has some flexibility when it comes to preferred dividends. If the company faces financial difficulties, the board can vote to suspend dividends temporarily or indefinitely to ensure the company's long-term viability.

Convertible Preferred Shares

Convertible preferred shares add an additional layer of flexibility. These shares can be converted into ordinary shares or loan stock under specific conditions, such as if dividends have been missed for several years. This feature can be advantageous for preferred shareholders, as it allows them to take a significant stake in the company if dividend payments are consistently missed.

Conclusion

In summary, the payment of dividends to preferred stocks is influenced by a variety of factors, including the availability of earnings, the discretion of the company’s board, and the specific type of preferred stock. These factors often result in a more flexible and condition-based approach to dividend payments when compared to the more rigid requirements of bond payments.