Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel

Bonds, notes, mortgages, debentures, certificates of indebtedness, equipment trust certificates, and other evidences of debt, that yield interest, as contrasted with equity securities, such as preferred stocks, common stocks, and other evidences of ownership, that yield dividends and other distributions. Interest and dividends differ in their strength of claim, interest being a fixed charge which if not paid entitles the creditors to legal recourse in event of default; whereas dividends are not fixed charges, being dependent upon availability of funds therefor as well as decision by the management of the entity whether or not to pay dividends. Omission of dividends, therefore, does not give equity owners the power to enforce any claim for dividends; even in the case of cumulative preferred stocks, omission of dividends does not give holders of such preferred stocks legal recourse for payment but merely the entitlement to such omitted dividends (on which no interest is paid) plus regular dividends before the common stock shall receive dividends; and in the event of liquidation, entitlement of such omitted dividends plus the asset preferences for the preferred stocks, before the common stock receives any distributions.