Accounting Dictionary

Cumulative Preferred Stock

If a company issues cumulative preferred stock. They must pay all dividends in arrears to the preferred stockholders before they can pay any dividends at all to the common stockholders.

The preferred stockholders get preferred treatment compared to the common stockholders. If the company is low on cash, they must pay dividends to all their preferred stockholders before they can pay the common stockholders. Let’s say preferred stockholders are supposed to get $15,000 a year, but the company has no money and pays the cumulative preferred stockholders nothing. In year two the cumulative preferred stockholders must get the $15,000 owed to them from the first year plus their full current dividend, a total of $30,000 before the common stockholders can get a single penny.

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