Preferred stocks generally come with a "guaranteed" dividend amount, but it's important to realize that if the company falls on tough financial times, even preferred dividends can be suspended. Fortunately, most preferred stocks are cumulative, meaning that any unpaid dividends will accumulate and must be paid before any dividends can be paid to common stockholders. When this happens, the accumulated dividends are called dividends in arrears. Here's how to calculate dividends in arrears if it happens to one of your preferred stocks.
How to calculate dividends in arrears
Here are the steps to follow to calculate the amount of preferred dividends owed to you:
First, determine the dollar amount of each of your preferred shares' fixed quarterly dividends. Preferred stock dividends are typically expressed as a set percentage of the par value, which is usually $25. For example, a preferred stock with a stated dividend yield of 6% would pay an annual dividend of $1.50 per share. There are a few preferred stocks with different par values, but you should be able to find any preferred stock's annual dividend in its prospectus. Then, divide by 4 to determine the quarterly dividend per share.
Once you know the quarterly dividend per share, multiply it by the number of shares you own to determine your total annual preferred dividend amount.
Finally, multiply the number of quarterly dividend payments the company has missed by the total quarterly dividend you're owed to determine the dividends in arrears you are owed.
Be sure to subtract any partial payments the company may have made along the way. It's not uncommon for companies to simply reduce dividends during tough times, rather than suspend them entirely.
Remember, these are dividends that have to be paid before the company can pay any dividends to common shareholders. While there is no such thing as a truly guaranteed preferred dividend, preferred shareholders are higher on the priority list than common shareholders and therefore have more of a claim to the company's profits.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at firstname.lastname@example.org. Thanks -- and Fool on!