Definition
The term cumulative preferred stock refers to securities containing a feature that requires the payment of passed dividends to preferred shareholders before providing common shareholders with a dividend payment. While it's possible for a company to issue noncumulative preferred stock, these securities would be considered unattractive to investors.
Explanation
Companies have the ability to attach a number of features or restrictions to the preferred stock they issue to the market. For example, preferred stock can be issued as cumulative, participating, convertible, and callable. These features can add to, or subtract from, the value the security provides to investors.
Nearly all preferred stock issued today has a cumulative feature, which protects the rights of these shareholders to dividends. Specifically, if the directors of the company fail to declare a scheduled dividend, it is termed as "passed." This can happen if the company has difficulty meeting all of its current financial obligations. If the preferred stock has a cumulative feature, the total of all the passed dividends is referred to as "dividends in arrears."
Before a company can provide the shareholders of common stock with a dividend, all of the dividends in arrears must be paid to shareholders of cumulative preferred stock. Finally, when a company fails to declare a scheduled dividend, there is no liability created or recorded on the company's books; however, a footnote should appear in the company's financial statements.
Related Terms
- The term participating preferred stock refers to securities containing a feature that allows shareholders to receive an additional dividend if certain conditions are met. This additional dividend is typically linked to the payment of common stock dividends. When preferred stock contains this feature, the securities can be fully-participating or partially participating.
Moneyzine EditorNovember 6th, 2024 
The term callable preferred stock refers to securities containing a feature that allows the issuer to redeem or call in the shares at its option. Callable preferred stock will specify the redemption price as well as a date after which the securities can be redeemed.Moneyzine EditorJanuary 10th, 2024
The term convertible preferred stock is used to describe one of several classes of preferred stock that can be issued by a company. To add to the marketability of this investment, convertible preferred stock provides the holder with the right to exchange this investment for shares of common stock.Moneyzine EditorNovember 6th, 2024
