Preferred Stocks and Dividends: A Guide for Investors

When it comes to investing, there are many different types of securities and commodities to choose from. Each with its own unique features and potential benefits. One type of security that investors may consider is preferred stocks, which offer some distinct advantages over other types of investments. 

One of the most attractive features of preferred stocks is the potential for regular dividend payments, which can provide a steady stream of income for investors, also known as dividends. In this guide, we’ll take a closer look at preferred stocks and annual dividends and discuss why they may be a good choice for some investors.

Typically companies pay dividends to mitigate the company’s costs associated with the high cash/low debt capital structures that would eventually result if they did not pay dividends. Thus, it is noted that established companies are known to regularly offer dividends to their stockholders.

What are preferred stocks?

Preferred stocks are a type of security that represents ownership in a company, similar to common stocks. However, preferred stocks are different from common stocks in several key ways. First, preferred stocks generally pay a fixed dividend, while the dividend on common stocks can fluctuate based on the company’s performance. Second, preferred stockholders typically have a higher claim on a company’s assets and earnings than common stockholders. This means that if a company were to liquidate, preferred stockholders would be paid before common stockholders.

A company’s board of directors is allowed to issue preferred stocks without the approval of common stockholders. This action may decrease the stock price, but this will not affect the preferred stockholders or their dividend payout.

One of the reasons why investors may be drawn to preferred stocks is the potential for regular dividend payments and cash dividends. Unlike common stocks, which may or may not pay a dividend, preferred stocks typically pay a fixed dividend on a fixed payment date. This can provide investors with a reliable source of income, which can be especially appealing for those who are looking to supplement their retirement savings or other long-term financial goals.

Understanding dividends

Before we dive into the details of preferred stocks and dividend yield, it’s important to have a clear understanding of what dividends are and how they work. Essentially, a dividend is a payment made by a company to its shareholders. Dividends are usually paid in cash, but they can also be paid in the form of additional shares of stock or other forms of payment.

Dividends are typically paid out of a company’s profits, although a company can also pay a dividend even if it is not profitable. In general, companies that pay dividends are seen as more stable and financially sound than companies that do not pay dividends. This is because companies that pay dividends are often generating enough profits to support their operations while also returning money to their shareholders.

When it comes to preferred stocks, the dividends are typically paid at a fixed rate. This means that the dividend payment is predetermined and will not change, regardless of the company’s financial performance. For example, if a company issues preferred stock with a 5% dividend, the stock will pay a 5% dividend every year, regardless of whether the company’s profits increase or decrease or the volatility of the stock market.

In addition to the fixed rate, preferred stock dividends are also cumulative. This means that if a company is unable to pay a dividend for one year, the unpaid dividends will accumulate and must be paid before any common stock dividends are paid. This provides an extra level of protection for preferred stockholders, as they are guaranteed to receive their dividend payments even if the company experiences financial difficulties.

Ex-Dividend Date

Another crucial thing you you must understand about preferred stocks and dividends is this term. The ex-dividend date is the first day after the dividends have been paid after their record date. If you sell your stocks before this date, you will forfeit the dividends you have accumulated over the period since the last payout. All companies, mutual funds,  ETFs, or investment firms will notify of this date, so you will know when it’s coming.

Types of Dividends

• Cash dividends- The most common type of dividend. It is when the company pays a portion of its earnings in the form of cash
• Dividend stocks- Instead of paying cash, companies can also pay investors with additional shares of stock.
• Dividend reinvestment programs (DRIPs)- Offered through companies or brokerage accounts. it’s a plan offered by a company to shareholders that it allows them to automatically reinvest their cash dividends in additional shares of the company stock on the dividend payment date.
• Special dividends- This is distributed when the company has an excess of cash from the company’s earnings
• Preferred dividends-  A preferred dividend is a dividend that is allocated to and paid on a company’s preferred shares. If a company is unable to pay all dividends, claims to preferred dividends take precedence over claims to dividends that are paid on common shares.

Benefits of preferred stocks and dividends

There are several benefits to investing in preferred stocks and dividends. First, preferred stocks offer a fixed dividend payment, which can provide a steady stream of income for investors. This is especially appealing for those who are looking for a reliable source of income to supplement their retirement savings or other long-term financial goals.

Second, preferred stockholders have a higher claim on a company’s assets and earnings than common stockholders. This means that if a company were to liquidate, preferred stockholders would be paid before common stockholders. This provides an extra level of protection for preferred stockholders and can help to reduce investment risk.

Dividends and Capital Gains

Dividends, much like profiting from share prices going up, will be taxed in the same way. The capital gains tax. The difference being if you lose money in stocks, you do not have to pay taxes on the loss (obviously), but it is very hard to lose money on dividend-paying stocks and dividend-paying companies. Be sure to consult with a financial advisor whenever you invest your money in anything and make sure to find out the dividend amount before investing.

Finally, preferred stocks can also provide diversification benefits for investors. By dividend investing in your investment strategy, you are ensuring a steady cash flow. Financial advisors typically recommend investing in dividend-paying stocks as part of a diversified portfolio.

If you are an accredited investor, you may qualify for International Land Alliance’s preferred stock dividends. Visit us at our website and contact a representative to talk about your options today.