Dividends are the distribution of corporate earnings to its shareholders. They are determined by the corporate board of directors and may consist of cash or additional stock. Dividends are most commonly distributed quarterly.
Shareholders that own shares before the ex-dividend date are entitled to receive any dividends that have been approved by the board of directors.
Many corporate boards choose not to payout dividends and instead retain any earnings which are used to grow the company.
Corporations can make dividend payments even when they have no or insufficient income in order to create a track record of consistent dividend distributions. Dividends may be paid out of earnings and/or retained earnings but corporations are usually prohibited from paying dividends out of the capital of the company.
Preferred dividends are dividends paid on preferred shares. These dividends are often higher than those paid on common stock, for the same company, but not always. Preferred dividends are given priority over common stock dividends which means they must be paid before common stock dividends are paid. This is often calculated on a cumulative basis. Preferred shareholders usually receive a preference in the event that the corporation is liquidated. In addition, preferred shareholders may have the right to convert their shares into common stock at some point in time based on a defined formula.