Definition:

Preferred dividends are payments made by a corporation to its preferred shareholders. These dividends are typically fixed and must be paid out before any dividends can be distributed to common shareholders.

Formula:

Preferred Dividends = Preferred Dividend Rate x Par Value of Preferred Stock x Number of Preferred Shares

How to use the metric:

Preferred dividends are used to determine the amount of earnings that must be set aside for preferred shareholders before calculating earnings available to common shareholders. This is crucial for assessing the company's ability to pay dividends to common shareholders and for evaluating the financial obligations associated with preferred stock.

Limitations:

Preferred dividends can be inflexible, as they represent a fixed obligation that must be met regardless of the company's financial performance. This can strain a company's cash flow, especially during periods of low earnings. Additionally, preferred dividends do not provide insights into the company's overall profitability or operational efficiency.

Applies to:

Preferred dividends are relevant in industries where companies frequently issue preferred stock, such as utilities, financial services, and real estate investment trusts (REITs). These industries often use preferred stock as a financing tool due to their stable cash flows and need for capital.

Doesn't apply to:

Industries that rarely issue preferred stock, such as technology or startups, may not find preferred dividends relevant. These industries often rely on equity financing through common stock or venture capital, focusing more on growth than on fixed dividend obligations.

Summary:

Preferred dividends are fixed payments to preferred shareholders that take precedence over common dividends. They are crucial for understanding a company's financial obligations but may not reflect overall profitability. This metric is most applicable in industries with stable cash flows and frequent use of preferred stock, while less relevant in growth-focused sectors.