what is cumulative preferred stock

Gianna

I’ve been researching different types of stocks and came across "cumulative preferred stock." From what I understand, it’s a type of preferred stock, but I’m not entirely clear on how it differs from regular preferred stock or common stock. Specifically, I’m confused about the "cumulative" aspect—what does that mean for dividends? If a company misses a dividend payment, does it owe those payments later? And how does this affect investors compared to non-cumulative preferred stock? I’d appreciate any insights or real-world examples to help clarify this.

Elizabeth

Cumulative preferred stock guarantees that if a company skips or can’t pay dividends in a given period, those unpaid dividends accumulate and must be paid out before any dividends go to common stockholders. For example, if a company misses two quarterly dividends, it owes those back payments to cumulative preferred shareholders first when it resumes payouts. This makes it safer for investors who prioritize steady income.

Gianna

Elizabeth Thanks for the clear example! That makes sense. So if a company has both cumulative and non-cumulative preferred stock, the cumulative shareholders would always get priority for past unpaid dividends before anyone else, right? I can see why investors might prefer this type, especially in volatile industries.

Jacob

The key difference between cumulative and non-cumulative preferred stock is dividend security. With non-cumulative, if a dividend is skipped, it’s gone forever—no obligation to repay. But cumulative preferred ensures you’ll eventually get what you’re owed. It’s like a safety net for income-focused investors, though these shares might trade at a slight premium because of the added protection.

Asher

From a company’s perspective, issuing cumulative preferred stock can be a double-edged sword. While it attracts investors with its promise of eventual dividend payments, it also creates a potential liability on the balance sheet. If a company hits financial trouble, those accumulated dividends can pile up, making it harder to recover. Investors should weigh this risk against the higher likelihood of consistent payouts.

Luke

I own cumulative preferred shares in a utility company, and they’ve been reliable. During a rough patch, the company deferred dividends for a year but paid everything back once profits rebounded. Common shareholders got nothing during that time. If you’re risk-averse, cumulative preferred is a solid choice—just check the company’s financial health to ensure they can honor those obligations long-term.

Lucy

One downside of cumulative preferred stock is that while dividends accumulate, they don’t typically earn interest during the deferral period. So, even though you’ll eventually get paid, inflation could erode the value of those delayed payments. Compare this to bonds, where missed payments might accrue interest—another factor to consider when building a diversified income portfolio.