When are dividends on preferred stock paid compared to common stock?

Dividends on preferred stock are paid before common stock dividends. This priority reflects the nature of preferred stock, which is designed to provide a more stable and predictable return to its holders. Preferred shareholders typically have a contractual right to receive dividends at a specified rate before any distributions are made to common shareholders.

In corporate finance, this hierarchy is crucial, especially in situations where a company may not have sufficient earnings to fully cover dividend obligations. If dividends are declared, preferred stockholders must be paid first as a matter of contractual obligation, ensuring they receive their entitled returns before any profits are allocated to common stockholders. This structure protects the interests of preferred shareholders, making preferred stock a less risky investment relative to common stock.

Understanding this order in dividend payments helps investors assess the relative risk and return of different types of stock, informing their investment decisions.