How to Compute Dividend for Preferred Shares
Lily AldridgeHow to Compute Dividend for Preferred Shares
Preferred shares are a type of investment that grants its holders priority over common stockholders in terms of dividend payments. If you are an investor in preferred shares, it is important to understand how their dividends are calculated. In this article, we will discuss the steps involved in computing the dividend for preferred shares.
Step 1: Determine the Par Value of the Preferred Shares
Thepar valueis the face value of the preferred shares, which represents the initial investment made by the shareholder. To compute the dividend, you need to know the par value of the preferred shares. This information can be found in the company's prospectus or on the stock exchange where the shares are listed.
Step 2: Identify the Dividend Rate
Thedividend rateis the percentage of the par value that the company agrees to pay as dividends to the preferred shareholders. This rate is usually fixed, but it can also be variable, depending on the terms of the shares. Once you know the dividend rate, you can calculate theannual dividend payment.
Step 3: Calculate the Annual Dividend Payment
To calculate the annual dividend payment, multiply the par value of the preferred shares by the dividend rate. For example, if the par value of the preferred shares is $100 and the dividend rate is 5%, the annual dividend payment would be $5 per share.
Step 4: Determine the Payment Frequency
Thepayment frequencyrefers to how often the company pays dividends to the preferred shareholders. It can be monthly, quarterly, semi-annually, or annually. Once you know the payment frequency, you can calculate the dividend payment per period.
Step 5: Calculate the Dividend Payment per Period
To calculate the dividend payment per period, divide the annual dividend payment by the number of payment periods in a year. For example, if the annual dividend payment is $5 per share and the payment frequency is quarterly, the dividend payment per period would be $1.25 per share.
In conclusion, computing the dividend for preferred shares involves determining the par value, identifying the dividend rate, calculating the annual dividend payment, determining the payment frequency, and calculating the dividend payment per period. As an investor, it is important to understand these steps to make informed investment decisions.
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