Understanding Preference Shares and Dividend Rights

Preference shares represent a class of shares that have certain rights or preferences over ordinary equity shares. These preferences typically relate to the payment of dividends and the distribution of assets during liquidation. Understanding the specific entitlements of Preference shares is crucial for investors and students alike.

Dividend Entitlement for Preference Shareholders

One of the most significant preferences associated with Preference shares is their right to receive a dividend before any dividend is paid to equity shareholders. Crucially, the dividend rate for Preference shares is usually pre-determined at the time the shares are issued. This pre-determined rate is typically a fixed rate, often expressed as a percentage of the face value of the share.

For example, if a company issues 10% preference shares with a face value of $100, the preference shareholders are entitled to a $10 annual dividend per share, provided the company has sufficient profits available and the directors decide to pay a dividend. This payment must happen before any dividend is considered for the ordinary equity shareholders.

Comparing Preference Shares and Equity Shares Dividend

Let's look at the key difference in dividend entitlement:

• Preference Shares: These are typically entitled to a fixed rate of dividend. The amount is usually specified upfront and does not change with the company's profits (though the payment itself depends on profitability).
• Equity Shares: The variable rate of dividend for equity shares depends entirely on the company's profits and the decision of the board of directors. If profits are high, the dividend might be high; if low, it might be low or zero. They receive dividends only after preference shareholders have been paid their fixed entitlement.

Therefore, a fundamental characteristic distinguishing Preference shares is their entitlement to a fixed rate of dividend, providing a level of income stability not typically found with ordinary shares. The notion of a variable rate of dividend is associated with equity shares, not Preference shares.