What Is Cumulative Preferred Stock?

Cumulative preferred stock is a type of 澳洲幸运5官方开奖结果体彩网:preferred stock with a provision that stipulꦇates that if any dividend payments have been missed in the past, the dividends owed must be paid out to cumulative preferred shareholders first. This is before other classes of preferred stock shar꧂eholders and common shareholders can receive dividend payments. Cumulative preferred stock is also called cumulative preferred shares.

Understanding Cumulative Preferred Stock

Cumulative preferred stock is one type of preferred stock; a preferred stock typically has a fixed 澳洲幸运5官方开奖结果体彩网:dividend yield based on the 澳洲幸运5官方开奖结果体彩网:par value of the stock. This dividend is paid out at set intervals, usually quarterly, to preferred holder🅘s. Preferred stocks are valued similarly to bonds. Bond proceeds are considered to bꦺe a liability, while preferred stock proceeds are counted as an asset. Also, bondholders have a priority claim on company assets.

Missed Payments and Cumulative Preferred Stock

When a company runs into fin😼ancial problems and cannot meet all of its obligat💝ions, it may suspend its dividend payments and focus on paying business-specific expenses and debt payments. When the company gets through the trouble and starts paying out dividends again, standard preferred stock shareholders possess no rights to receive any missed dividends. These standard preferred shares are sometimes referred to as non-cumulative preferred stock.

In contrast, holders of the cumulative preferred stock shares will receive all divide🦋nd payments in arrears before preferred stockholders receive a payment. Essentially, the common stockholders have to wait until all cumulative preferred dividends are paid up before they get any dividend payments again. For this reason, cumulative preferred shares often have a lower payment rate than the slightly riskier non-cumulative preferredಌ shares.

Example of How Cumulative Preferred Stock Works

For example, a company issues cumulative preferred stock♉ with a par value of $10,000 and an annual paymeꦦnt rate of 6%. The economy slows down; the company can only afford to pay half the dividend and owes the cumulative preferred shareholder $300 per share. The next year, the economy is even worse and the company can pay no dividend at all; it then owes the shareholder $900 per share.

In year three, the economy booms, allowing the company to resume dividends. The cumulative preferred stock shareholders must be paid the $900 in arrears in addition to the current dividend of $600. Once all cumulative shareholders recei🥀ve the $1,500 due per share, the company may consi𒐪der paying dividends to other classes of shareholders.

Risk Factor of Cumulative Preferred Stock

As the cumulative feature reduces the dividend risk to investors, cumulative preferred stock can usually be offered with a lower payment rate than required for a noncumulative preferred stock. Due to this lower cost of capital, most companies' preferred stock offerings are issued with the cumulative feature. Generally, only blue-chip companiesꦗ with strong dividend his🍌tories can issue non-cumulative preferred stock without increasing the cost of capital.