Cumulative Preferred Stock
If the past dividends have been omitted for some reasons, they must be paid to the preferred stockholders rather than the common shareholders. This is known as cumulative preferred stock.
Cumulative preferred stock holders are paid dividends on priority basis depending on the par value. They are usually paid quarterly dividends however if the company suns in to financial problems preferred stock holders might not get their dividends. Further, when the company becomes stable again it their duty to pay all the owed dividends to the cumulative preferred stock holders.
Preferred stock dividend yield depends on the par value. For example if the company issued preferred stock with a return of $9 per year the preferred stock holders will get a fixed return of $9 only. It is the duty of the company to pay the preferred stock holders before they even pay a penny to common stock holders. Further cumulative preferred stock means that all the dividends that the company owes to the preferred stock holders. The priority of preferred stock holders is primary and absolute while common stock holders get paid afterwards. No matter what the situation is preferred stake holders must be paid first.
Most preferred stock is cumulative however preferred shares have fixed quarterly income mostly. They are treated as perpetuity and the preferred shareholders don’t even have voting rights. The board is not in much fiduciary relationship with preferred stockholders than they are with the common stakeholders. The rate of return on cumulative preferred stock depends on the market interest rates which are prevailing when these stocks are first issued. They are then traded in the market just like common stock. The cumulative preferred stock are rated by the rating agencies in the market which decide looking at the credibility of the rate of return the company can pay to preferred stock holders. If the company liquidates it is their responsibility to pay their owed dividends to all the preferred stakeholders first. This accumulation of the dividend that is paid to the preferred stock holders over common stock holders is known as cumulative preferred stock.
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