Preferred dividends are a form of payment given to preferred shareholders by companies as a reward for investing in the company. Preferred shares are a form of capital that is preferred over common stock in a company’s capital structure. Preferred shareholders typically receive preferential treatment over common shareholders in terms of dividends and liquidation rights. While common shareholders are not contractually entitled to any dividends, preferred shareholders are guaranteed the payment of their dividend payments.

Preferred dividends are typically higher than common stock dividends since preferred shareholder’s dividend payments have priority over payments to common shareholders. A company must declare all of its future dividend payments to its preferred shareholders in advance and allocate funds to cover the required dividend payments. Also, the company must pay the dividends out of its net income before any common earnings are paid out as dividends. This guarantees that the promised dividends to the preferred shareholders will be paid. These dividends accumulate when they are not paid out in the timeframe that was promised and can be distributed once the company has sufficient net income.

In addition to providing its shareholders with a regular source of income, preferred dividends also provide companies with a predictable source of revenue since the amounts of the dividend payments and their timing are predetermined. The fixed payout rates of preferred dividends make them attractive to investors seeking security from their investments.

Overall, Preferred dividends are an important source of income for preferred shareholders and a valuable source of capital for the companies that pay them. They allow companies to raise the necessary capital for their operations while rewarding investors for their loyalty and risk. With preferred dividends, investors receive higher payouts than common shareholders with the added security of a guarantee of payment of the declared dividends.