Fannie Mae Preferred S (FNMAS)

[rosen62]

I am saying that profits add to capital

Profits add to retained earnings. This is where the dividends come from. When they are declared an entry is made to debit them from the retained earnings account. What is not paid out continues to accumulate as retained earnings.

Are you saying that at times, when there is no profit, the balance of retained earnings is used to pay out dividends? This is correct. Boards can use the remaining earnings that have been retained anyway they want. They could also branch out and "appropriate" them in different ways. The retained earnings that are earmarked as dividends are "regular" or "unappropriated". A Board that finds better usage for the retained earnings may leave no room for pay outs as regular dividends and deplete the account.

Yes, preferreds are part of stockholder's equity but they do not participate in any excess of earnings above their own pay out. So they have little to no incentive on how the business is run. They gave up this right to acquire preferential liquidation treatment. (Note: the government probably knows this).

Are you confusing retained earnings with paid-in-capital (the excess above common and preferreds par-value)? Again, dividends do not come out of capital. That will be a distribution of capital.

Simply consider this common sense statement:
capital is "contributed capital". Not profit. Why would anyone want to distribute infused capital unless it was a windfall earning -like in the sale of an asset with the subsequent closing of the company-? You mean that investors will contribute capital via common or preferred shares and turn the page and begin distributing it as dividends? Capital is used to further a business. And out of the earnings produced comes the distribution.