Legal Definitions - preferred dividend

Preferred dividend refers to the payment made to the owners of preferred stock. This type of dividend is usually paid out before common stock dividends are issued. In case of bankruptcy, the claims for preferred dividends are given priority over claims for common stock dividends.

Suppose a company has issued both preferred and common stocks. The preferred stockholders are entitled to receive a fixed dividend of $2 per share, while the common stockholders receive a dividend of $1 per share. If the company earns a profit of $10,000, it will first pay out $2 per share to the preferred stockholders, which amounts to $2,000 in total. The remaining $8,000 will be distributed among the common stockholders.

This example illustrates how preferred dividends are paid out before common stock dividends. The preferred stockholders receive their fixed dividend first, and only then do the common stockholders receive their dividend.