Question

Stocks

There are two primary means to earn income as a stockholder. The first method is dividend income and the second method is earnings from capital gains. With respect to the investor seeking dividend income, when the investor buys a stock from a corporation with a primary focus to earn dividend income they will typically expect a higher dividend on common stock versus preferred stock. Discuss the dividend payment requirements of a common stock versus preferred stock, in terms of which type of stock has a primary claim on dividend distributions. Explain why the common stock investor demands a higher dividend rate.

Answer 1

preference shareholders have a preferential right over the dividend unpaid to them over common shareholders.

That is preference shareholders have the primary right over the dividend. Preference shareholders have a fixed amount of dividend, pre-fixed at the time of issue of preference shares.

the common stock investor demands a higher dividend rate because they are the actual owners of the company and bare the maximum risk.
They are sometimes called residual owners because their claim comes at the last after the payment of debt holders, preference shareholders and other creditors of the company at the time of liquidation.

Due to the nature of the payment (which is the last right), they expect a higher amount of dividend.

Equity dividend is not fixed, it may or may not be paid every year. The year in which it is paid, it is declared in the general meeting of the company and paid when accepted by the equity shareholders.