Main Answer:
Preferred stock has a fixed dividend, calculated as a percentage of par or a price per share, providing stability for investors.
Step-by-step explanation:
Preferred stock is a type of stock that has a fixed dividend, calculated either as a price per share or a percentage of par. This means that shareholders receive a consistent dividend payment, providing a predictable income stream. The fixed nature of the dividend distinguishes preferred stock from common stock, where dividends are variable and dependent on the company's profitability. This stability makes preferred stock an attractive investment for income-focused investors, as they can rely on a regular and known return on their investment.
In more detail, the fixed dividend of preferred stock is typically expressed as a percentage of the stock's face value or par value. For example, a preferred stock with a 5% dividend rate and a $100 par value will pay an annual dividend of $5 per share. In the case of preferred stock, these dividends must be paid out before any dividends can be distributed to common stockholders. This preferential treatment adds an additional layer of security for investors.
Additionally, preferred stockholders often have priority in receiving assets in the event of liquidation, further enhancing their position in the capital structure. While preferred stock may not offer the same potential for capital appreciation as common stock, its fixed dividend feature provides a stable income component to an investment portfolio.