Cumulative Preferred Stock

Cumulative preferred stock is a class of shares wherein any unpaid or undeclared dividends for the current year must be accumulated and paid for in the future. However, such stocks are costlier, do not have voting rights, and cannot demand interim dividends.

Cumulative Preferred stockholders get a fixed dividend rate irrespective of the profit margin; this means they are not participating in the company's profits. The benefit of these stocks is that in case of a financial crisis, if the company cannot declare the dividend, then the dividend amount will accumulate and will get paid in the future whenever the company declares the dividend.

• Cumulative preferred stock guarantees that any unpaid dividends accumulate and must be paid in the future, providing financial security to shareholders even during challenging periods.
• Holders of cumulative preferred stock receive a fixed dividend rate, regardless of the company's yearly profits, ensuring predictable income but without the potential for increased dividends during prosperous years.
• These stockholders have priority over common shareholders in receiving dividends and, in case of company liquidation, offering a level of safety and preference in financial matters.

The company has not declared dividends in the last four years due to the financial crisis. For the last four years, the dividends for the cumulative preferred stockholders were $20 each year, which was unpaid.

The business in the 5th year was great, so the management declared a dividend to its shareholders. However, the company will have to pay $80 to the cumulative preferred stockholders first, and then they are allowed to distribute the dividends to the common shareholders.

• The cumulative preferred stocks are safe and secure regarding financial safety among all other stocks available in the market. The reason behind the same is that they will always get their dividend irrespective of the company's bad performance.
• These stockholders are privileged to get the dividends before any other company stockholder.
• In an unpleasant situation of liquidation of the company, the cumulative preferred stockholders get the settlement at the earliest compared to other stockholders.
• The company should give the cumulative preferred stockholder the right to demand the dividend in case of financial failure. If the dividends are not paid at that time, then the dividends are accumulated in accounts and are paid afterward to the cumulative preferred stockholders when things are normal for the company.
• Such stockholders may get a higher rate of return in case the company gets a good year.

• The biggest disadvantage is that they don’t enjoy voting rights compared to other stockholders.
• Such shareholders will always get the fixed dividend irrespective of the profit earned during the year. In contrast, other stockholders will get the dividend payment per the company's profits.
• It is more costly than any other stocks available in the market since the cumulative preferred stock carries some extra privileges.
• They may get partial or delayed dividend payments from the company.
• The dividends are fixed, but in the case of any other stocks like debts, the management will have to pay the debt interest to the holder as well, and there cannot be any delay in the payment of the same.
• These stockholders cannot claim dividends in the middle of the year. They are not allowed interim dividends; they are only paid yearly.

This has been a guide to what is cumulative preferred stock. Here we discuss how it works, examples, advantages, and disadvantages. You can learn more about financing from the following articles –

• Callable Preferred Stock
• Participating Preferred Stock
• Preferred Dividend