Okay, you know what a dividend is. Companies generally commit to paying it when they have soooo much extra cash profit that they really don’t know what to do with the dough.
Yeah, nice place to be.
In the case of preferred stock, the dividends aren’t just…optional-ish. They operate more like bond interest. only with a catch. Dividends on preferred stock can, in fact, be halted without the company being repossessed by the debt holders. Like...in the case where the company falls on hard times. Or it wants to preserve its cash to buy a competitor. Or it just wants another jet-with-waterslide-thing.
So there are two types of preferred stock in this realm...the ones that pay cumulate dividends, and ones that don’t… cleverly named non-cumulative. Say a company has halted dividends from its preferred for 3 ½ years… and it was paying five dollars a quarter in dividends from those cumulative preferreds. Well, if it was to resume paying dividends on them, it would first have to pay all 14 quarters’ worth of dividends before it began to issue more dividends. That is, it owed 3 years times 4 quarters, or 12 quarters, plus a half year, or 2 quarters, for a total of 14, at 5 bucks a quarter a share. That's 5 times 14, or 70 bucks. Big obligation. But it has to pay that amount before it can resume dividend payments.
Why would a company have a cumulative feature in its preferred dividend obligation? Because investors forced it to do so, worried that the preferred dividends might be just summarily stopped, and then the investors would have little or no return on their investment in the preferreds. And this can be a problem for companies that have fallen on hard times. They are essentially made illiquid, in that they can’t afford to pay the back dividends on the preferreds, and they can’t raise more capital with this blight on their record of having stopped paying a divvy. Most preferred stocks are non-cumulative, and if companies decide to just stop paying them, they can…but if they do, it’s like they have kind of reneged on a handshake. And, uh…investors…talk.
So like…good luck to the company ever trying to raise capital again from the cold, cruel outside world.
Related or Semi-related Video
Finance: What are Dividends: Declaration...15 Views
Finance a la shmoop what are dividends? that is declaration date ex-dividend
date pay date and record date yeah so you thought you could just invest in the [Money transfers to market for stock]
stock pay 20 bucks a share and get to know 30 cents a share in dividends four
times a year right? That was all you needed to know oh yeah not so easy well maybe
it is easy but things are never so simple on the street the mean street you
know the Wall Street when you buy a share of stock that pays a dividend a
whole bunch of technical questions get asked and they basically all revolve [Question marks revolving around a stock]
around whether or not you are entitled to that thirty cents and if you think
about it dividends have been around for a long long time a whole bunch of
schemers out there trying to kind of ripoff that dividend in nefarious ways [Person tears off dividend from stock]
all right well why does it matter whether you're entitled to that thirty
cents or not well with all those nefarious people out there wouldn't you
think there are a whole bunch of sharpies they're trying to legally take [Man reading book of laws and loopholes]
advantage of the system like you know buying that $20 a share stock the day
before the dividend is payable holding the stock until that investor is owed
the dividend and then just selling the stock like five minutes later it's like
an ATM courtesy of equity stock dividend right good buy it and you sell it a [Person uses a equity stock dividends ATM]
couple days later make free profit move on well the markets are smarter than we
are and they adjust to that very quickly So anyway the laws have to
be crystal clear as they apply to that process or innocent people kind of get [Man locked away in a cell]
taken and each of the terms are on the technicals behind who gets what when in
the land of dividends matters a lot all right first up declaration date okay
that's the date when the board of directors publicly announces that they
will in fact pay a dividend along with the details relating to that dividend
like how big it will be the day you'll have to own the stock to be entitled to
receive that dividend and also the date that the dividend will actually be paid
all right so that's that next up the ex-dividend date and yes it [Laws appear]
sounds like something Charles Xavier and Magneto would argue about but in fact [Charles Xavier and Magneto appear]
it's not although that'd be a cool superhero to be like a ex-dividend
opposed to an x-men maybe that's like a Wall Street superhero
our lawyers are glaring at us right now the ex-dividend date is the last date
after which shares bought in a given company don't automatically have that
periods dividend attached so think about it like it's a Macy's white flower day [Macy's advert appears on TV screen]
sale discount on the share you're buying if you don't buy it by say
close of market Tuesday or whenever it is well then you don't get it that's the
ex-dividend date you don't get that freebie dividend discount when you buy
the share if you buy it after the close like at 4:01 p.m. on Tuesday you had to
buy it before the market closed on that Tuesday or whenever the ex-dividend date [Man stood next to clock]
was got it all right so all the other dates before this are called cum
dividend or with dividend such that anyone owning this stock at that period
has legal right to receive the dividend all right it is natural then for a $40
stock paying say a 50 cent dividend to naturally drop 50 cents the day after
the ex-dividend date comes into effect and in reality more or less this is what
happens albeit with many twists and turns in the market that is the stock
goes from 40 bucks to 39.50 a share you know the next minute so the key
delimiter date is the record date shareholders have to register their
ownership and yes your brokerage does that automatically usually of a given
share of stock on or before the date of record to get that dividend and
eventually when the dividend is finally paid magically that date is called the [Magicians stick taps stock and disappears in smoke]
pay date yeah shocker so yeah that's a lot of dates to keep track of kind of
reminds us of ourselves when we were in our 20s in college and had a social life
not anymore [Group of girls sitting together]
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