Cumulative preferred stocks, also known as cumulative preferred shares or cumulative preference shares, are a type of investment instrument issued by corporations to raise capital. These stocks represent an ownership interest in the company and entitle holders to a fixed dividend. What sets cumulative preferred stocks apart from other types of preferred stock is their unique characteristic of accrual.
In terms of dividend payment, cumulative preferred stockholders have the right to receive regular dividend payments at fixed intervals. However, if the corporation is unable to pay the dividends in any particular period, the unpaid dividends accumulate. This means that the company is obligated to pay the cumulative dividends in future periods, before any dividends can be paid to common stockholders.
The cumulative nature of these preferred stocks provides a level of security to investors. It allows them to be assured that their dividends will eventually be paid, even if the corporation faces temporary financial difficulties. These stocks are seen as less risky compared to noncumulative preferred stocks, where missed dividend payments may not be required to be paid back to the shareholders.
In the event of bankruptcy or liquidation, cumulative preferred stockholders have a higher claim on the company's assets compared to common stockholders. This means that they have a greater chance of recouping their investment. However, they are typically subordinate to bondholders or other debt holders.
Overall, cumulative preferred stocks offer investors a combination of stability and potential for return on investment by providing a consistent dividend stream and a priority position in the distribution of assets in case of liquidation or bankruptcy.
