Even though a preferred dividend is not a legal requirement, it is considered to be a fixed payment because even if the dividend is not paid this year, this year's dividend will need to be paid in the future before any common dividends can be paid (if it is a cumulative dividend).
This is a correct statement in that preferred dividends are often cumulative and interest is not. However, the interest is not cumulative because it must be paid every period, no matter what. So, preferred shares are preferable because even though the preferred dividend cumulates each period, it does not need to be paid each period.
Though preferred stock shares some of the characteristics of bonds, the payment of dividends is not a legal requirement for preferred shares. Therefore, if the company does not pay a preferred dividend in one period, it is not in default on the shares. However, if interest on debt is not paid one period, the company is technically in default on the bonds. This is an advantage for preferred shares compared to debt.
This is a reason to issue debt instead of preferred shares. We need to identify the reason to issue preferred shares instead of debt.
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