What is a Cumulative Preferred Stock?
Cumulative preferred stock is a type of preferred equity security that guarantees its shareholders the payment of dividends, which may accumulate if not paid in a given period. Unlike common stock, cumulative preferred shares have a higher claim on assets and earnings, including payment of dividends.
In the event that a company cannot pay dividends in any year, the unpaid amount is accumulated as "dividends in arrears." Before any dividends can be distributed to common stockholders, cumulative preferred stockholders must receive any and all accumulated dividends. This characteristic makes cumulative preferred stock an appealing choice for income-focused investors who seek steady cash flow.
Additionally, cumulative preferred stocks can exhibit advantages during periods of financial distress for a company. Although the company may skip dividend payments, it is legally obliged to make these payments before common shareholders can receive dividends. Thus, cumulative preferred stocks often appeal to conservative investors concerned about income consistency and portfolio stability.
In summary, cumulative preferred stocks are designed to provide more security to investors by ensuring that dividends are eventually paid, creating a more predictable investment compared to other equity forms.