When a company issues preferred shares of stock, it is obligated to pay the dividends on the preferred shares before it pays dividends to common shares. The preferred stock have minimum dividends that must be paid. If the company does not pay the preferred stock dividends, the preferred dividends accumulate over time, known as dividends in arrears. The company must pay out the dividends in arrears before it can pay any future dividends shares. To figure the amount of dividends in arrears, you need to know the preferred stock dividends per share, the number of preferred shares and the number of dividends the company has not paid.
Multiply the preferred stock dividends per share by the number of shares you own to find the amount you should be paid per period. For example, if the preferred shares promise a $1.80 per share, per quarter dividend and the company issued 400 shares, multiply $1.80 by 400 to find the company should pay $720 per quarter.
Multiply the dividends the company owes preferred shareholders per quarter by the number of quarters the company has not paid the dividend in full to find the amount it should have paid to preferred shareholders. For example, if the company has not paid full dividends in full for two quarters, multiply $720 by 2 to get $1,440 in dividends owed.
Subtract any dividends paid from the amount owed to preferred shareholders. Sometimes a company may pay a partial preferred dividend if it cannot pay the full dividend. For this example, if over the past two quarters the company paid $500 in dividends, subtract $500 from $1,440 to find the company owes preferred shareholders $940 in dividends in arrears.
- Harper College; Accounting for Equity; September 2007
- Midlands Tech; Corporations; Organization, Capital Stock Transactions and Dividends; Janice Stoudemire, CPA; 2007
- Electronic Code of Federal Regulations. "Title 12, Chapter III, Subchapter B, Part 327." Accessed June 16, 2020.
- University of Massachusetts Lowell. "Common Stock and Preferred Stock." Accessed June 16, 2020.
- Investor.gov. "Stocks." Accessed June 16, 2020.
- Investor.gov. "Callable or Redeemable Bonds." Accessed June 16, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."