What is a Cumulative Dividend?
A cumulative dividend is a dividend, usually on preferred shares, that must be paid before any other dividends on any of the issuer's other securities. Preferred stock that does not carry a cumulative dividend is referred to as "straight preferred."
How Does a Cumulative Dividend Work?
Let's assume Company XYZ issues some common stock outstanding on which the company paid a $0.50-per-share last quarter.with a $1-per-share cumulative quarterly . Company XYZ also has some
Now let's assume a recession has taken a toll on Company XYZ's cash flow, and the board has decided to suspend payments. Because the have a cumulative , once Company XYZ decides to resume making distributions, it must first "catch up" on any missed payments to the preferred shareholders (those outstanding the longest are paid first). Then it can resume making payments to the holders of its common stock. It must do this even if it does not completely suspend the preferred ; reducing them creates a similar obligation.
Why Does a Cumulative Dividend Matter?
rates of return than straight preferred because cumulative preferred carries the added risk of possibly not receiving regularly scheduled payments.that have cumulative dividends often have slightly higher