Final answer:
Preference dividends are paid out to preference shareholders before any dividends are distributed to ordinary shareholders, following the hierarchy of dividend payments. The decision to pay dividends is usually made by a company's board of directors.
Step-by-step explanation:
When it comes to paying out dividends, there is a hierarchy in place, with preference shareholders having priority over ordinary shareholders. Preference dividends must be paid out before ordinary dividends. Shareholders of preference stock are paid a fixed amount of dividend before any dividend is distributed to the holders of ordinary shares. For a company looking to pay dividends, the percent of the profits is distributed in-line with this predefined order.
The decision of when to issue stock, pay dividends, or re-invest profits is typically made by the company's board of directors, which can be a different process in private versus public companies. Shareholders invest in companies, such as stable firms including Coca-Cola and electric utilities, knowing that they can receive dividends, which are often seen as a stream of benefits, and taking into account the firm's expected profits and potential capital gains.