What Are the Rules on Cutting Dividends in Preferred Shares of Stock?
The manner and frequency with which dividends are paid to a company's preferred shareholders is determined by a covenant or contract between the issuing corporation and the investors who purchase the shares.
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Agreement
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In general, the covenant or agreement that defines the terms and conditions under which dividends will be paid on preferred stock is contained on the physical stock certificate or it can be found in the bylaws of the issuing corporation.
Features
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Most preferred shares are issued with a fixed dividend rate, which sometimes is expressed as a percentage of the shares par or nominal value.
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Significance
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Preferred stockholders are entitled to priority or preference in the payment of dividends. A corporation must pay dividends to its preferred shareholders first before it distributes any dividends to its common stockholders.
Dividends Not Guaranteed
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Unless otherwise specified by the preferred stock contract, dividends are declared and payable at the discretion of the company's board of directors. A corporation may elect to cut the dividend payment to its preferred shareholders due to lower earnings or other financial considerations.
Cumulative Preferred
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In the event dividend payments are suspended, some preferred stock contracts require a corporation to pay to its preferred shareholders all dividends in arrears in addition to any regularly scheduled dividend payments.
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