Definition:

Preferred dividends (CF) refer to the cash flow allocated to preferred shareholders as a return on their investment in a company's preferred stock. These dividends are typically fixed and must be paid out before any dividends can be distributed to common shareholders.

Formula:

Preferred Dividends = Number of Preferred Shares Outstanding × Dividend Rate per Share

How to use the metric:

Preferred dividends are used to assess a company's obligation to its preferred shareholders and to evaluate its financial health. Investors and analysts use this metric to understand the company's cash flow commitments and its ability to meet these obligations before distributing profits to common shareholders.

Limitations:

Preferred dividends do not provide insight into the overall profitability or financial performance of a company. They also do not account for potential changes in dividend policies or financial conditions that could affect the company's ability to pay these dividends in the future.

Applies to:

Industries with companies that frequently issue preferred stock, such as utilities, financial services, and real estate investment trusts (REITs), where stable and predictable dividend payments are common.

Doesn't apply to:

Industries where companies rarely issue preferred stock, such as technology or early-stage startups, because these companies typically reinvest profits into growth rather than distributing dividends.

Summary:

Preferred dividends represent the cash flow commitment to preferred shareholders, offering insights into a company's financial obligations. While useful for understanding dividend obligations, they do not reflect overall profitability or financial health. This metric is most applicable in industries with stable dividend practices and less relevant in high-growth sectors.