Legal Definitions - fixed-return dividend

A fixed-return dividend is a type of payment made by a company to its shareholders where the amount or percentage of the dividend is predetermined and remains constant, regardless of the company's fluctuating profits. This differs from common stock dividends, which can vary based on the company's financial performance and board decisions. Fixed-return dividends are most commonly associated with preferred stock, which offers investors a predictable income stream.

Here are some examples illustrating fixed-return dividends:

• Example 1: Public Utility Company Preferred Stock

  A large public utility company issues preferred stock with a stated annual dividend of $2.50 per share. An investor purchases 100 shares of this preferred stock. Every year, as long as the company is financially able to pay dividends, the investor will receive $250 ($2.50 x 100 shares) in dividends. This payment remains constant, even if the utility company's profits surge one year or dip slightly the next. The "fixed-return" aspect is demonstrated by the unchanging $2.50 per share dividend amount.

• Example 2: Startup Funding with Preferred Shares

  A growing tech startup seeks investment and offers preferred shares to early investors. These shares come with a contractual agreement to pay a 6% annual dividend based on the initial investment amount. If an investor puts in $100,000, they are guaranteed to receive $6,000 in dividends each year, provided the company has sufficient earnings to distribute. This dividend amount is fixed at 6% of the initial investment, offering a predictable return to the early backers, irrespective of the company's volatile early-stage profitability.

• Example 3: Financial Institution's Perpetual Preferred Stock

  A major bank issues "perpetual preferred stock" that pays a quarterly dividend of 1.25% of its par value, which is set at $100 per share. This means each preferred share will consistently pay $1.25 every three months, totaling $5.00 per year. An individual holding these shares can rely on receiving this specific, unchanging dividend payment each quarter, providing a stable income stream that is not directly tied to the bank's quarterly profit fluctuations, as long as the bank maintains its ability to pay.