How to Compute the Amount of Dividends That Must Be Paid to Preferred Stockholders

Corporations share their earnings with stockholders through dividend payments.

Preferred dividends are those that pay a fixed rate to stockholders. In general, dividends are a corporation's way of distributing some of their earnings to investors. Preferred stockholders have certain rights over common stockholders and firms must pay dividends on preferred stock before paying common stockholders. Some preferred stock also has cumulative rights. If a firm cannot pay preferred dividends in a given period, the obligation accumulates until the company has enough money to pay its preferred stockholders. Common stockholders do not enjoy this right.

Instructions

1. Locate the dividend percentage payment for the stock in the stock's prospectus. The firm's balance sheet also shows this percentage in the stockholders' equity section. The dividend payment is stated as a percent of the stock's par value in the year the firm declares a dividend, or as a specific dollar amount per share.

2. Multiply the dividend percent by the preferred stock's per-share par value, and then multiply this result by the total number of shares issued.

3. Check to make sure all calculations are accurate. For example, a firm's stockholders' equity section could show its contributed capital from preferred stock as follows: 5% preferred stock, $20 par, 8,000 shares authorized, 5,000 shares issued, with a recorded capital investment of $100,000. Calculate the preferred dividend calculation as 5% x $20 par x 5,000 shares issued = $5,000.

4. Multiply the payment per share by the number of shares issued in order to obtain a specifically defined monetary dividend amount per share.

References

• University of Massachusetts, Lowell: Cash Dividends
• Jacksonville State University: Dividend Transactions