Understanding Corporate Dividends

by David Jenyns on July 14, 2008

Dividends are what stockholders are waiting for when they invest in a corporation.

The remainder is the corporation’s net income or net revenue, sometimes called “earnings.”

A company with two classes of stock is likely to call one class “preferred”; or maybe there are a first preferred and a second preferred. Preferred stock is a compromise between a loan and an equity.

This uncertainty of dividends causes more fluctuation in the market price of preferred stock than on bonds issued by corporations, although probably not as much as on the common stock of the same corporations.

When a company’s net income goes up, the dividend on a share of preferred stock remains at the scheduled rate, while on a common share the increased revenues are probably reflected in a larger dividend, and the market price of a common share rises more than on the preferred. When revenues are poor, maybe dividends will continue on the preferred but not on the common; or maybe dividend payment will stop on both classes of stock.

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