Legal Definitions - dividend preference

Dividend preference is a term used in the stock market. It means that holders of preferred shares have the right to receive a dividend before the company pays dividends to holders of common shares. Preferred shares are a type of stock that gives shareholders priority over common shareholders when it comes to receiving dividends and assets in the event of liquidation.

For example, if a company has both preferred and common shares and decides to pay a dividend, it must first pay the dividend to the preferred shareholders before paying any dividends to the common shareholders. This ensures that preferred shareholders receive a return on their investment before common shareholders.

One example of preferred stock is cumulative preferred stock. This type of stock must receive dividends in full before common shareholders may receive any dividend. If the corporation omits a dividend in a particular year or period, it is carried over to the next year or period and must be paid before the common shareholders receive any payment.

Another example is callable preferred stock. This type of stock may be repurchased by the issuing corporation at a prestated price, usually at or slightly above par value.