Calculating Preferred Dividends: A Balance Sheet Guide

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Things You'll Need

• Most recent company balance sheet

• Calculator

Warning

Always investigate the company to learn of its stability, profitability, management situation and future prospects. Owning preferred shares in a troubled company could result in loss of your investment. Examine the market fluctuations of a company's preferred stock, because its trends and/or volatility displays how the "market" feels about the organization and its outstanding share values.

Tip

Learn if the company has a consistent record of paying preferred dividends annually, or, at least, regularly. Investigate prior preferred dividends to learn if the company usually pays a cash, stock or other property-type dividend.

Preferred stock differs from common stock in a few significant areas. Payment of dividends is a potentially major difference because preferred stock comes with a stated dividend rate. Common stock dividends carry no such provision and are declared after year-end by a Board of Directors. Preferred stock rates and terms are displayed on the balance sheet or in the notes relating thereto. Use this information to calculate dividends for companies with preferred stock.

Step 1

Examine the Shareholders' Equity section of the balance sheet. This area appears right after the Liabilities listing. Shareholders' equity includes preferred and common stock outstanding, other paid-in capital, retained earnings and treasury stock, if any. Preferred stock will have a percentage or an amount (i.e., 4 percent or $4) and, possibly, the word "cumulative," along with a "par value" (i.e., $100 and the number of preferred shares that are "issued and outstanding").

Step 2

Multiply the amount stated by the number of shares issued and outstanding to calculate preferred stock dividends due. For example, if the amount is $4, which means the amount the company pays per share, and there are 50,000 preferred shares issued and outstanding, multiply $4 times 50,000 shares. Projected preferred stock dividends are therefore $200,000.

Step 3

Multiply the percentage (if no dollar value is stated) by the par value of preferred stock to calculate a dollar value of dividends due for each share. For example, a 4 percent dividend on preferred stock with a $100 par value equals $4 per share. Multiply 0.04 (percentage) times $100 (par value) to arrive at a dividend of $4 per preferred share.

Step 4

Investigate whether the company paid a preferred dividend in the last year or two, if the word "cumulative" appears on the balance sheet. Cumulative means that if the company pays the calculated preferred dividend this year, it must also pay any previous year's dividends it was unable to pay. Although dividends, common or preferred, are never guaranteed, cumulative preferred dividends ensure shareholders that, when dividends are paid, they will receive all that are contractually due, including prior years' dividends that previously went unpaid.