Preferred Dividend Coverage Ratio

Disappointing the common folk is one kind of problem. But disappointing the big shots is a different trauma entirely. It can cause serious problems. They ask to talk to your manager. They will speak to their attorneys. They will let their brother-in-law, the State Senator, know about the situation.

In the finance world, common shareholders represent the common folk. Preferred stock holders represent the big shots. If a company wants to know if it's in danger of disappointing those big shots, it can use the preferred dividend coverage ratio.

The figure tracks how easily a company can cover the preferred dividends it owes to holders of preferred stock. It compares the company's net income to its preferred dividend obligations. The higher the ratio, the better off the company is (the more earnings it has compared to its obligations).

Companies can cut common stock dividends or decide not to pay them at all. Shareholders will howl and the stock will plummet, but those are options the firm has. Preferred dividends are different. The company is obligated to pay them.