Dividend Payment Preferences

Brian Krogol
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So another important concept with dividends is dividend preferences. When we have two classes of stock. When we have common stock and preferred stock, we have to remember that the preferred stock always receives their dividends first. Okay. They always receive their dividends first. And why whatever is left over goes to the common stockholders. Okay, so let's check it out. In this example, the apartment depot currently has 5000 shares of $100 par value, 8% preferred stock. That's a lot of words there. Let's outline what we have for preferred stock here in blue And 100,000 shares of 50 cent par value. Common stock. So this is our common stock information right here in red. The apartment depot declares and pays a dividend of 220,000. So notice here we're just saying declares and pays a dividend. They usually try and separate questions of the declaration date, record date. And here we're just focused on how are we going to split the dividends between preferred and common? So they declare and pay a dividend of $220,000. What is the amount received by preferred shareholders and common shareholders? So the first thing we Wanna do is we want to find out how much the preferred shareholders are due. Right? They're gonna be do a certain amount of dividends based on their percentage there. They have a dividend percentage of 8% and that's going to be paid on their par value. So each share of stock, $100 is the par value of the preferred stock times the 8% 0.8. It comes out to $8 per share. Right? Each share of preferred stock will receive an $8 dividend. And we have to multiply that by the number of outstanding shares, right? They tell us there's 5000 shares outstanding. And this will tell us the total amount that should be received by the preferred stockholders and that's gonna come out 5000 times eight. Well that's just 40,000, right? 40,000 is the dividend for preferred, Right? And that just is us finding their their per share dividend of $8 per share and multiplying it by the number of shares. So no matter what, no matter how big the dividend is, the preferred shares are only gonna receive 40,000. We could have paid a million dollar dividend and the preferred shares would still get only 40,000. Okay, so the 1st 40,000 will always go to them. Now, what if the dividend had only been 30,000 instead of 220,000? The dividend had only been 30,000? Well then that whole 30,000 would have gone to the preferred because they're they're due the 1st 40,000 and it didn't reach 40,000. So everything would go to preferred. In this case, we have something greater than their preferred dividend. So the common stockholders will get something as well. Let's find out what the common stockholders get. And this is as easy as just subtracting the total dividend minus what the preferred shareholders get. So common stockholders Are going to receive the 220,000 everything minus what went to the preferred shareholders of 40,000. So they're going to receive 100 and 80,000 right? 180,000 goes to the common stockholders. It's as easy as that. So they could ask you this a couple different ways. They could say, how much is the total amount that goes to each of them? Or they could ask for a per share amount and you just have to divide. So let's fill this out at the bottom. The total preferred dividend Was 40,000, right? It was 40,000 total preferred dividend for all the preferred shareholders. And on a per share basis it was $8 per share. Right? That's what we saw when we did our calculation up here, we could also do 40,000 Total dividend divided by the 5000 shares. 5000 5000 shares, and it would equal $8 per share. Right, But we already knew that for the preferred. Now, what about the common? We see the total, I'm gonna get out of the way, we see the total dividend for the common is 100 and 80,000. Right? They got 100 and $80,000 but we don't know the per share yet. So we just have to take that 180,000 And divided by the number of common shares, which in this case was 100,000. So what does that come out? 280,000 divided by 100,000? No, it comes out to a dollar 80 per share. So each common share receives a dollar 80 in dividends. Okay. And this number could change, right? It would it would be different if the total dividend had been different, right? If instead of paying 220,000, we had paid 300,000 or paid 100,000. Right, this common dividend would change, but the preferred dividend, it will always be that percentage that they receive, right? They're going to receive their 8% On their part value. Okay. The only time the preferred wouldn't get their total $8, per share would be if we paid a dividend smaller than 40,000, but that would be pretty rare in a question like this. They would really be trying to trick you if they gave you a dividend smaller than the preferred uh required dividend there. Cool. All right. Why don't we pause here and then try some practice problems related to dividends?