Do preferred shareholders always receive a dividend? Explanation would be really helpful!?

Question

Do preferred shareholders always receive a dividend? Explanation would be really helpful!?

Answer 1

Depends on what type of investor you are talking about. Income investors want dividends because they rely on getting those cheques in the mail. If you are a growth investor, you hate dividends since it will likely reduce the overall share price. Stock's which issue dividends tend to have a much more stable price meaning you are less likely to make a huge profit on selling the stock itself.

If a company is doing poorly, it shouldn't be offering a dividend and if I were a shareholder I would be concerned about money being distributed in this fashion. It would be better for them to stop paying dividends and spend the money developing the business to improve their profit.  

I am a growth investor and not an income investor.

Answer 2

While the vast majority of preferred shares carry a dividend, it is not a requirement. Most preferred shares do not have voting rights and are issued as a way to raise capital without diluting the existing common share base. The dividend on a preferred stock is similar to interest on a bond. It is an inducement to invest in the company while foregoing voting rights. When preferred shares carry a dividend, that dividend must be paid before any dividends can be paid on common shares. If the issuing company is liquidated due to bankruptcy, preferred shareholders would be paid before common shareholders, but they are second to bond holders. Many preferred shares carry what is called cumulative dividends. That means if the company does not have the funds to pay the dividend, it is accumulated until the company is able to begin paying again. In other words, if the shares carry a dividend of $2.00 but the company cannot pay it for 2 years, the holder is entitled to the $4.00 that would have been regularly paid over those 2 years.

There are many variations in the structure of preferred stocks, but this should help answer your question.