How to Compute Preference Share Dividend

How to Compute Preference Share Dividend

Preference shares are a type of equity security that gives shareholders a priority claim on the company's earnings compared to common stockholders. The company payspreference share dividendsto these shareholders before paying dividends to common stockholders. As an investor, it is essential to understand how to compute preference share dividends to determine the potential return on your investment.

1. Understand thedividend rate

The first step in computing preference share dividends is to understand the dividend rate. The dividend rate is the fixed percentage of the par value of the preference share that the company pays as a dividend. For example, if the dividend rate is 5% and the par value of the preference share is $100, the company pays $5 as a dividend per share.

2. Determine the outstanding preference shares

The next step is to determine the outstanding preference shares. This number represents the total number of preference shares issued by the company that are currently held by shareholders. The total outstanding preference shares multiplied by the dividend rate will give you the total amount of dividends paid by the company.

3. Consider thedividend payment frequency

Preference share dividends can be paid quarterly, semi-annually, or annually, depending on the company's policy. The dividend payment frequency affects the total amount of dividends paid to preference shareholders. For example, if the dividend rate is 5%, and the preference shares are paid annually, the company pays $5 per share per year. If the preference shares are paid quarterly, the company pays $1.25 per share per quarter.

4. Calculate the cumulative dividends

Cumulative dividends are dividends that accumulate if the company fails to pay the full amount of dividends in any given year. Cumulative preference shares have a provision that allows the company to pay the accumulated dividends at a later date. To calculate cumulative dividends, multiply the outstanding preference shares by the dividend rate and the number of years of accumulated dividends.

5. Determine the dividend yield

The dividend yield is the total amount of dividends paid to preference shareholders divided by the total outstanding preference shares. It is a measure of the return on investment for preference shareholders. A higher dividend yield indicates a higher return on investment.

In conclusion, computing preference share dividends involves understanding the dividend rate, determining outstanding preference shares, considering the dividend payment frequency, calculating cumulative dividends, and determining the dividend yield. As an investor, it is essential to consider these factors when investing in preference shares to make informed investment decisions.