Is it true that dividends must be paid to preferred shareholders before common shareholders?

Is it true that dividends must be paid to preferred shareholders before common shareholders?

• A. True
• B. False
• C. Only if approved by board
• D. Not applicable to all companies

Answer: (B)

Dividends are not guaranteed and depend on the board’s decision to declare a payout. Preferred shareholders typically have priority to dividends when a dividend is actually paid, but there is no obligation to pay in every period. If the board decides not to declare a dividend, or if the company lacks sufficient funds, no one receives a payment, including preferred holders. In the case of cumulative preferred stock, any missed dividends must be paid later before common dividends, but even then only after a declaration and when funds are available. So the statement that dividends must be paid to preferred shareholders before common is not universally true.

Dividends are not guaranteed and depend on the board’s decision to declare a payout. Preferred shareholders typically have priority to dividends when a dividend is actually paid, but there is no obligation to pay in every period. If the board decides not to declare a dividend, or if the company lacks sufficient funds, no one receives a payment, including preferred holders. In the case of cumulative preferred stock, any missed dividends must be paid later before common dividends, but even then only after a declaration and when funds are available. So the statement that dividends must be paid to preferred shareholders before common is not universally true.