Commonly, many investors are only familiar with common stock, but not the preferred stock. It has a huge role in a company’s income statement. Preferred stock affect the valuation of a company since it gives a significant effect on the profit and loss reported by the companies.
Defining Preferred Stock Dividend and Net Income
Net Income and preferred stock have a big effect on the company’s income statement. The income statement, itself, is a kind of financial statement. It includes various information about the company, including the company’s revenue, net income, expenses, gains, and losses.
Meanwhile, net income shows the total revenue made by a company after they pay their tax before they pay preferred stocks in a particular period. If you want to invest in a company that pays a preferred stock dividend, you cannot rely on the reported net income only.
Preferred stocks are taken from the company’s income statement. That is because the stakeholders of preferred stocks can have a higher claim than the common stakeholders.
Usually, many companies mention the preferred stock dividends within their income statements. After that, they report “net income applicable to common”, another net income figure.
For instance, there is a company with total revenue of $10 million after it pays taxes. After that, the company pays preferred stock dividends of $1 million. The company’s net income applicable to common is $9 million.
The Nature of Preferred Stocks
Basically, preferred stock is like the combination of the stock and bond. If you choose to invest in the preferred stock, it will pay you a guaranteed and relatively higher dividends.
If there I a chance that the company bankrupt, you will be prioritized than common stockholders to get any remaining asset of that company. Yet, in exchange for that safety, you will not get entitled to share the success of that business in the future.
If the company successfully makes a huge fortune in the next future, you will only receive your preferred stock dividends, while common stockholders can earn significantly more.