Corporations may pay dividends to stockholders in the event of surplus revenues. Dividends are offered for a variety of reasons, and preferred stockholders have pre-emptive rights to a dividend over common shareholders. There are no legal obligations a company has to pay a dividend or even offer one, but the dividend proceeds first go to a company that is behind on dividend payments and can begin repaying them.
Order of Dividends
Preferred stockholders have first rights to a dividend over common stockholders. When a company can't pay any dividends and then realizes enough revenues to start paying again, preferred shareholders may have back dividends due if the stock is considered cumulative. If it's designated non-cumulative, only the current dividend is due.
Preferred Stock
Preferred stock is non-voting stock issued to individuals and other corporations mainly for its dividend-paying qualities. The lack of control is made up in being considered primary debt holders over common stockholders. This not only means they have priority if the company were to go bankrupt, it also means preferred stockholder dividends must be paid in full before any dividends go to common shares.
Common Stock
Common shareholders are equity owners of a corporation. They have voting privileges, but fall to the back of the line when it comes to bankruptcy filings or dividend payments. A strong company will continually pay dividends and increase them over time, but still has no obligation to actually pay them.
Conclusion
If a corporation issues cumulative preferred stock and starts missing dividend payments, it may be a while before common shareholders get to see dividends again. Certain sectors of the economy are more likely than others to pay dividends such as consumer staples and utilities. These relatively stable companies usually pay a steady dividend and don't go in arrears.
