Preferred Dividend Formula

Preferred Dividend Formula (Table of Contents)

• Preferred Dividend Formula
• Preferred Dividend Formula Calculator
• Preferred Dividend Formula in Excel (With Excel Template)

Preferred Dividend Formula

The formula for calculating the Preferred Dividend is as follows:

Where,

Number of preferred stocks: the number of shares the preference shareholder is holding. Preference shareholders are entitled to get fixed dividends on a regular interval.

Par value: the face value of a bond or any fixed-income instrument. Par value is also known as Face Value or Nominal Value.

Rate of Dividend: the rate at which the dividend will be paid out, it is calculated at par value.

Examples of Preferred Dividend Formula

Anand has invested in preferred stocks of a company. As per the company policy, Anand is entitled to get a preferred dividend of 7% @ par value of a stock. Par value of each stock is $150. Anand has bought 1500 preferred stocks of that company. What is the amount of preferred dividend Anand will be getting each year?

In this case, we have the rate of dividend and par value is given, now we can calculate a preference dividend using the formula.

Preferred Dividend Formula = Number of preferred stocks *Par Value * Rate of Dividend

• Preferred Dividend = $1500 * 0.07 * 150
• Preferred Dividend = $ 15750.

It means that each year, Anand will get $ 15750 preferred dividends.

Explanation of Preferred Dividend Formula

Preference Dividend is the amount of money received from a company from its retained earnings every year to the preference shareholders for holding the preference shares.

First of all, while the share price can go up and down, the preferred stock is structured more like

Few things that you must know for calculating the preferred dividends.

Firstly, preferred shares have a par value on dividend pay-out is calculated. Next, the rate for the preferred dividend is set by Company at the time of share issue. Preferred shares can move up and down in price and the actual dividend yield is based on the current price of any company’s stock.

Let’s assume stock of Anand Group of companies are available at $50 and dividend rate offered @8%. Firstly, we have to convert the dividend rate into a decimal. i.e. 8 % as 0.08, which have been arrived by dividing percentage by 100 and then multiply par value with the dividend rate as a percentage. As per above-stated example, the preference share yield is $2.5 apiece every year. And if you want to calculate preferred dividend simply multiply the preference share yield with the preference share you own. Assuming you have 500 preferred shares of Anand group of companies, then your annual preferred dividend would be $2.5 multiply by 500. That brings to $1250 as the dividend income for the preference shareholders.

And if you want to calculate a company’s total dividend payment to their preferred shareholders, then simply multiply the per-share amount and the total number of preferred shares outstanding. However, many companies’ issues preferred shares in different series of preferred stock with different dividend rates and par values. So, in order to calculate the total preferred dividend, you’ll need to compute the dividend payment for every series of preferred stock issued by the company.

Significance and Use of Preferred Dividend Formula

• Preferred dividends are a good option for the investors that are risk averse and looking to invest in less risky assets. It offers a fixed rate of return every year.
• Preference Stocks are normally referred to Preference shares, dividends are paid out to preference shareholders before common shareholder’s dividend.
• Preference shareholders are offered higher dividend rates than the equity or common shareholders as they don’t have ownership control on the company.
• Preferred stock is also referred to as a hybrid security as it can be classified as a security with characteristics of both common stock and a bond, (fixed pay-out on a regular interval).
• Preferred share can be converted to a fixed number of common shares. In some case, preferred shares have a specific time period after which these shares can be converted into common shares, while in another case the conversion can be done after the approval from the board of directors.
• Even in case of bankruptcy, the preference shareholders are eligible to be paid from the assets of the company first. The pay-out of preference is on regular basis.
• If a company does not declare payments to shareholders, then the payment of dividend to the preference shareholder is put into arrears. This feature of arrears is only available in case of non-cumulative preferred stocks. It’s a liability for a company and is included in the accounts book.
• It’s a legal obligation for the company to pay-out the preferred dividend.

Interpretation of Preferred Dividend Formula

Investors usually purchase preferred stock as a source of regular income in form of dividends. Preferred stock prices & yields tend to change depending on the prevailing interest rates. If interest rates increase, preferred stock prices can fall, which will increase the dividend yields. And vis-à-vis if interest rates fall, the preferred stock price rises and there is a drop in dividend yield.

While evaluating the investment potential of a preferred stock, it is good to compare its dividend yield to the corporate bond’s yield.

The par value and the rate of a dividend are determined by the company and the same is disclosed to the investor during the issue.

A company cannot announce any dividend if it has carried forward losses or the depreciation for the previous year are not set off against the company’s current year.

Preferred dividend is paid through the after-tax profit of the company. It can only be paid out of company profits after adjusting depreciations or out of the retained earnings.

A dividend can be paid only in cash, another medium can be cheques, warrant or electronic medium.

Preferred Dividend Calculator

You can use the following Preferred Dividend Calculator

Preferred Dividend Formula in Excel (With Excel Template)

Here we will do the same example of the Preferred Dividend formula in Excel. It is very easy and simple. You need to provide the three inputs of Number of preferred stocks, Par Value, and Rate of Dividend

You can easily calculate the Preferred Dividend using Formula in the template provided.

Here we calculate Preferred Dividend using Formula.

Recommended Articles

This has been a guide to a Preferred Dividend formula. Here we discuss its uses along with practical examples. We also provide you with Preferred Dividend Calculator with downloadable excel template. You may also look at the following articles to learn more –

1. Key Differences of Common stock And Preferred stock
2. Difference Between Options and Stock
3. Comparison – Dividends vs Capital Gains
4. Growth Stock and Value Stock