--- title: Preferred Dividend Coverage Ratio | Formula, Example, Analysis, description: The preferred dividend coverage ratio is a sign of a company’s capacity to pay dividends to preferred stock shareholders. Click to know more. --- [![Carbon collective](https://www.carboncollectiveinvesting.com/hubfs/raw_assets/public/CarbonCollective_August2021%20copy/images/carbon-collective-green-investing-logo-white.4f6047d4.svg "Carbon collective")](https://www.carboncollectiveinvesting.com/) - About - Employers - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - [401(k) Comparison Tool](https://www.carboncollectiveinvesting.com/401k/plan-comparison-tool) - Individuals - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [ETF](https://www.carboncollectivefunds.com/) - Learn - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Blog](https://blog.carboncollective.co/) - [Tools](https://tools.carboncollective.co/calculator/) - Log in - [Carbon Collective](https://app.carboncollective.co) - [Altruist](https://app.altruist.com) [Talk to a human](https://ask.carboncollective.co/f4o5dylkg) [Sign up](https://app.carboncollective.co/sign-up) [Log In](http://app.carboncollective.co/) [![Carbon collective](https://www.carboncollectiveinvesting.com/hubfs/raw_assets/public/CarbonCollective_August2021%20copy/images/carbon-collective-green-investing-logo.53b28bee.svg "Carbon collective")](https://www.carboncollectiveinvesting.com/) - About - Employers - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - [401(k) Comparison Tool](https://www.carboncollectiveinvesting.com/401k/plan-comparison-tool) - Individuals - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [ETF](https://www.carboncollectivefunds.com/) - Learn - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Blog](https://blog.carboncollective.co/) - [Tools](https://tools.carboncollective.co/calculator/) - Log in - [Carbon Collective](https://app.carboncollective.co) - [Altruist](https://app.altruist.com) [Talk to a human](https://ask.carboncollective.co/f4o5dylkg) [Sign up](https://app.carboncollective.co/sign-up) [Log In](http://app.carboncollective.co/) **[Home](https://www.carboncollectiveinvesting.com/) > [Sustainable Investing](https://www.carboncollectiveinvesting.com/sustainable-investing) >** Preferred Dividend Coverage Ratio # Preferred Dividend Coverage Ratio ![](https://www.carboncollectiveinvesting.com/hubfs/Brooke%20Tomasetti.png) Written by Brooke Tomasetti | Reviewed by [Subject Matter Experts](https://www.carboncollectiveinvesting.com/subject-matter-experts) Updated on October 1, 2024 Fact Checked Why Trust Carbon Collective? ### Table of Contents The preferred dividend coverage ratio shows a company’s capacity to pay preferred [shareholders](https://www.carboncollectiveinvesting.com/sustainable-investing/stockholders-equity/) their dividends, which are predetermined and fixed. The better a company’s fiscal position, the higher its preferred dividend coverage ratio, and the more capable it is of paying owed preferred dividends. The ratio is also used to assess a company’s overall financial health. Also called times preferred dividend earned ratio, the preferred dividend coverage ratio examines a company’s net income to know if it’s enough to cover the fixed dividend payments due on its outstanding preferred shares. Hence, it is helpful to all shareholders, would-be shareholders and debt holders as a tool for assessing a company’s financial status. Preferred stock dividends are paid either quarterly or yearly, making them somehow similar to other fixed-income investments such as bonds. Preferred stocks are attractive to investors looking for a constant income supplement. These are investors who will likely keep the stock long-term. And, of course, there are exchange-traded funds (ETFs) too, which focus on purchasing shares of preferred stocks. ## Preferred Dividend Coverage Ratio Formula ![](https://www.carboncollectiveinvesting.com/hubfs/image-png-Apr-23-2022-08-41-13-10-AM.png) Calculating a company’s preferred dividend coverage ratio starts with calculating the year’s preferred dividends, where the formula is: ![](https://www.carboncollectiveinvesting.com/hubfs/image-png-Apr-23-2022-08-41-36-96-AM.png) Both the annual dividend rate and the share par value can be obtained from the prospectus of the preferred stock issue. The resulting value can then be used as the denominator (bottom half of the fraction) to work out the preferred dividend coverage ratio. Calculating the preferred dividend coverage ratio can also be done quarterly by dividing the annual net income and the annual dividend dollar amount by 4, and then using the resulting values to calculate the ratio. Companies will generally have more than enough profit to make this dividend payment, but not in some cases. A preferred dividend coverage ratio of at least 1 indicates that the company can fulfil its preferred dividend obligation, while a ratio under 1 means the business is in a seriously compromised fiscal state and has no capacity to pay the dividend. In a way, a company paying preferred dividends is like a homeowner paying his monthly mortgage. If the homeowner spends most of his earnings on his mortgage, he will easily default with any tiny change in his earnings – for example, if he contracts an illness or meets an accident that makes him unfit for work. In the same way, a company that is making just enough money to make its preferred dividend payments may lose the ability to do so when affected by serious fiscal issues. This is why a higher ratio is always more favorable. It shows that the company has enough financial leeway to still meet its preferred dividend obligation under any circumstances. If a company’s preferred dividend coverage ratio is low, its financial statements should be scrutinized further to assess its overall financial stability. Sometimes, it could just be due to a bad period, which is why comparing coverage ratios over a number of quarters or even years is important to get a more accurate picture of the company’s true state. ## Preferred Dividend Coverage Ratio Example Sam is a financial manager in search of opportunities to expand his portfolio. He scans the web for top ten lists of companies that pay the highest preferred dividends and finds that insurance company 123 Inc. is consistently on top. He does further research and learns that the tech giant’s net income in the prior year was $30 million, and the preferred issue was for a total par value of $20 million at 5%. This also means the company’s annual preferred dividend amount for that year was $1 million. Let’s break it down to identify the meaning and value of the different variables in this problem. - Net income: $30,000,000 - Annual preferred dividend amount: $1,000,000 Now let’s use our formula: ![](https://www.carboncollectiveinvesting.com/hubfs/image-png-Apr-23-2022-08-42-07-40-AM.png) In this case, 123 Inc. would have a preferred dividend coverage ratio of 30. With a preferred dividend coverage ratio of 30, it is clear that 123 Inc. is more than capable of meeting its yearly preferred dividend obligation with its annual profits. In fact, it can cover 30 times more than what it is required to pay, so preferred shareholders need not worry about receiving their dividends. On top of that, the ratio indicates that 123 Inc. is in a generally good fiscal position. ## Preferred Dividend Coverage Ratio Analysis  Banks, lenders and other creditors also use the preferred dividend coverage ratio to look into a company’s ability to pay for future debt. Even common stock shareholders may benefit from this coverage ratio as it is applicable to all kinds of stock dividends.  Whether paid quarterly or yearly, these preferred dividends are similar to other fixed-income investments such as bonds. Preferred stocks are attractive to investors looking for a constant income supplement. These are investors who will likely keep the stock long-term. And, of course, there are exchange-traded funds (ETFs) too, which focus on purchasing shares of preferred stocks. It’s also important to remember that there are several types of coverage ratios that can help shed light on a company’s capacity to fulfill its financial responsibilities. Since the market does not consider dividends as a standard or requirement, it may not be very accurate to compare one company with a low preferred dividend coverage ratio to another that doesn’t even pay any dividends. Furthermore, preferred dividends are cumulative. This means that if dividends are unpaid within a certain quarter, the amount due will be carried over to the next payout. Hence, preferred shareholders should not obsess about a missed a payout. It’s normal for cash flows and costs to fluctuate within a year. When a company decides against paying out dividends for a certain quarter, it should not automatically raise concerns. If the ratio appears to be declining over the next few quarters, that is the time to investigate further. ## Preferred Dividend Coverage Ratio Conclusion - The preferred dividend coverage ratio is a sign of a company’s capacity to pay dividends to preferred stock shareholders. - This formula requires two variables: net income and annual preferred dividend amount. - The preferred dividend coverage ratio is often expressed as a plain decimal number. - This calculation is used by common shareholders to determine whether or not a company is likely to pay a dividend on common shares. - Preferred shares pay a fixed and predetermined dividend and are therefore a revenue-earning investment akin to bonds. ## Preferred Dividend Coverage Ratio Calculator You can use the preferred dividend coverage ratio calculator below to quickly measure a company’s ability to pay preferred dividends to shareholders, by entering the required numbers. Annual Preferred Dividend Amount Net Income Preferred Dividend Coverage Ratio   ## FAQs ### 1. What is preferred dividend coverage ratio? The preferred dividend coverage ratio is a measure of a company's ability to pay dividends on its preferred shares. The market does not consider dividends as a standard or requirement, so it may not be very accurate to compare one company with a low preferred dividend coverage ratio to another that doesn't even pay any dividends. ### 2. How is preferred dividend coverage ratio calculated? The preferred dividend coverage ratio is calculated by dividing a company's net income by its annual preferred dividend amount. This ratio is expressed as a decimal number. ### 3. What is a good preferred dividend coverage ratio? There is no definitive answer to this question, as the preferred dividend coverage ratio varies from company to company. However, a good ratio would be one that is above 1, indicating that the company has more than enough funds to cover its annual preferred dividend obligations. ### 4. What does preferred dividend coverage ratio show us? The preferred dividend coverage ratio shows us how well a company can cover its annual preferred dividends. A ratio that is above 1 is good, while a ratio that falls below 1 may indicate that the company is not able to pay its annual preferred dividends. ### 5. Why is preferred dividend coverage ratio important? The preferred dividend coverage ratio is important because it indicates a company's ability to pay dividends on its preferred shares. This information is useful for common shareholders who want to know whether or not the company is likely to pay a dividend on its common shares. ### Related Topics - [Sustainable 401(k) Plan](https://www.carboncollective.co/401k) - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing/) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Retirement Glossary](https://www.carboncollective.co/sustainable-investing/retirement-planning-glossary) - [Best Retirement Plans](https://www.carboncollective.co/sustainable-investing/the-10-best-retirement-plans) - [Wealth Manager Vs Financial Advisor](https://www.carboncollective.co/sustainable-investing/wealth-manager-vs.-financial-advisor) ![Attend Our Next Webinar](https://www.carboncollectiveinvesting.com/hubfs/carbon-collective-green-investing-icon-webinar.12af7b6e.svg) ### Attend Our Next Webinar Join our next Sustainable Investing 101 webinar, get our favorite DIY options, and walk through how we build our portfolios. [Watch Now](https://www.carboncollective.co/sustainable-investing-webinar-green-retirement-month) ![Get Our Newsletter](https://www.carboncollectiveinvesting.com/hubfs/carbon-collective-green-investing-icon-demo.6ed28722.svg) ### Get Our Newsletter Go a level deeper with us and investigate the potential impacts of climate change on investments like your retirement account. Join Newsletter ![close-typeform](data:image/gif;base64,R0lGODlhEQARAIAAAODn7P///yH5BAEHAAEALAAAAAARABEAAAIqBIKpab3v3EMyVHWtWZluf0za0XFNKDJfCq5i5JpomdUxqKLQVmInqyoAADs=) ![Talk To A Human](https://www.carboncollectiveinvesting.com/hubfs/carbon-collective-green-investing-icon-chat.49d48c5b.svg) ### Talk To A Human Joining a new investment service can be intimidating. We’re here for you. Click below to email us a question or book a quick call. [Ask a Question](https://ask.carboncollective.co/f70pooobq) Topics ## Sustainable Investing Topics View our list of some topics below. See More - Portfolios - [Performance](https://www.carboncollectiveinvesting.com/returns) - About - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - Learn - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - Contact - [Contact us](mailto:hello@carboncollective.co) - [Legal](https://www.carboncollective.co/legal) - [Privacy Policy](https://www.carboncollectiveinvesting.com/hubfs/2022-11%20Carbon%20Collective%20Privacy%20Policy.pdf) - [Back to top](https://www.carboncollectiveinvesting.com/sustainable-investing/preferred-dividend-coverage-ratio#top-of-page) DISCLAIMERS: Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective"), an SEC-registered investment adviser. A copy of Carbon Collective's current written disclosure statement discussing Carbon Collective’s business operations, services, and fees is available at the SEC’s investment adviser public information website – [www.adviserinfo.sec.gov](https://adviserinfo.sec.gov/firm/summary/310129) or [our legal documents here](https://blog.carboncollective.co/legal-documents/). The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. Carbon Collective does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Carbon Collective’s web site or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Investments in securities: Not FDIC Insured • No Bank Guarantee • May Lose Value. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Carbon Collective's charges and expenses. Carbon Collective's internet-based advisory services are designed to assist clients in achieving discrete financial goals. They are not intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation and do not incorporate specific investments that clients hold elsewhere. For more details, see our Form CRS, Form ADV Part 2 and other disclosures. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature. Not an offer, solicitation of an offer, or advice to buy or sell securities in jurisdictions where Carbon Collective is not registered. © 2026 Carbon Collective Corporation. All rights reserved. × #### Fact Checked Carbon Collective partners with financial and climate experts to ensure the accuracy of our content. Our team of reviewers are established professionals with years of experience in areas of personal finance and climate. They have contributed to top tier financial publications, such as Reuters, Axios, Ag Funder News, Bloomberg, Marketwatch, Yahoo! Finance, and many others. This team of experts helps Carbon Collective maintain the highest level of accuracy and professionalism possible. × #### Why Trust Carbon Collective Carbon Collective is the first online investment advisor 100% focused on solving climate change. We believe that sustainable investing is not just an important climate solution, but a smart way to invest. We follow ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. Much of our research comes from leading organizations in the climate space, such as Project Drawdown and the International Energy Agency (IEA). Our goal is to deliver the most understandable and comprehensive explanations of climate and finance topics. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including MarketWatch, Bloomberg, Axios, TechCrunch, Forbes, NerdWallet, GreenBiz, Reuters, and many others. We strive to empower readers with the most factual and reliable climate finance information possible to help them make informed decisions. } ```json { "@context" : "https://schema.org", "@type" : "Organization", "alternateName" : "Carbon Collective", "contactPoint" : { "@type" : "ContactPoint", "areaServed" : "US", "availableLanguage" : "en", "contactType" : "customer service", "telephone" : "(650) 868-2697" }, "logo" : "https://www.carboncollective.co/hubfs/CarbonCollectiveLogo.png", "name" : "Carbon Collective Investing LLC", "sameAs" : [ "https://www.facebook.com/carboncollectiveinvesting/", "https://twitter.com/carbncollective", "https://www.instagram.com/carbon.collective/", "https://www.youtube.com/channel/UC769Y-F-L_B37kyQfdpvyXA", "https://www.linkedin.com/company/carbon-collective/", "https://www.crunchbase.com/organization/carbon-collective", "https://adviserinfo.sec.gov/firm/summary/310129", "https://www.wikidata.org/wiki/Q110243690" ], "url" : "https://www.carboncollective.co/" } ``` ```json { "@context" : "https://schema.org", "@type" : "FAQPage", "mainEntity" : [ { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "The preferred dividend coverage ratio is a measure of a company's ability to pay dividends on its preferred shares. The market does not consider dividends as a standard or requirement, so it may not be very accurate to compare one company with a low preferred dividend coverage ratio to another that doesn't even pay any dividends." }, "name" : "What is preferred dividend coverage ratio?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "The preferred dividend coverage ratio is calculated by dividing a company's net income by its annual preferred dividend amount. This ratio is expressed as a decimal number." }, "name" : "How is preferred dividend coverage ratio calculated?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "There is no definitive answer to this question, as the preferred dividend coverage ratio varies from company to company. However, a good ratio would be one that is above 1, indicating that the company has more than enough funds to cover its annual preferred dividend obligations." }, "name" : "What is a good preferred dividend coverage ratio?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "The preferred dividend coverage ratio shows us how well a company can cover its annual preferred dividends. A ratio that is above 1 is good, while a ratio that falls below 1 may indicate that the company is not able to pay its annual preferred dividends." }, "name" : "What does preferred dividend coverage ratio show us?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "The preferred dividend coverage ratio is important because it indicates a company's ability to pay dividends on its preferred shares. This information is useful for common shareholders who want to know whether or not the company is likely to pay a dividend on its common shares." }, "name" : "Why is preferred dividend coverage ratio important?" } ] } ``` ```json { "@context" : "https://schema.org", "@type" : "BlogPosting", "author" : { "@type" : "Person", "name" : "https://20345524.fs1.hubspotusercontent-na1.net/hubfs/20345524/Brooke%20Tomasetti.png", "url" : "https://www.carboncollectiveinvesting.com/sustainable-investing/author/brooke-tomasetti" }, "dateModified" : "2024-10-01", "datePublished" : "2021-03-24", "description" : "The preferred dividend coverage ratio is a sign of a company’s capacity to pay dividends to preferred stock shareholders. Click to know more.", "headline" : "Preferred Dividend Coverage Ratio | Formula, Example, Analysis,", "image" : "", "mainEntityOfPage" : { "@id" : "https://www.carboncollectiveinvesting.com/sustainable-investing/preferred-dividend-coverage-ratio", "@type" : "WebPage" }, "publisher" : { "@type" : "Organization", "logo" : { "@type" : "ImageObject", "url" : "https://www.carboncollective.co/hubfs/CarbonCollectiveLogo.png" }, "name" : "Carbon Collective" } } ```