Non-Cumulative Preferred Stock

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Noncumulative preferred stock refers to the preferred stock shares which usually have dividends starting all over in every year. In case the company fails to pay dividends in one year, the dividends will not accumulate in arrears. The company is only expected to pay the dividends for the current year before the remaining amount is paid to the common shareholders.

Preference shareholders will always have priority over the common shareholders when it comes to receiving dividends. Whenever a company decides to pay dividends to its shareholders, the first priority is given to the preference shareholders. Based on how and when the preferred dividends are paid out, there exist several classes of preferred stock

a) Cumulative Preferred stock

b) Non cumulative preferred stock

In case a corporation is experiencing financial difficulties, the board of directors may opt to omit, reduce, eliminate or suspend the dividend. The common shareholders will have no choice. Nevertheless, the cumulative shareholders will have their dividends accumulate in the books of the company until the company resumes paying dividends. They will therefore receive the accumulated dividends in arrears together with the present dividend when the company decides to pay dividends.

The dividends of the noncumulative stock will not be in arrears in case a company decides not to pay dividends. In other words, the company will not have to make up for any dividends that were omitted on the non cumulative stock before the dividends are declared. However, it is a must for the noncumulative preferential stock holders to get dividend before the common shareholders are paid dividends.

Non-cumulative preference shareholders offers a company the chance and greater flexibility to better manage its cash flow. This is because the payments may be suspended without any penalties being imposed on the corporation.

Additionally, due to the nature of the preferred stock, there is a certain protection level that is extended to the shareholders. Non-cumulative preferred stock holders have the assurance that no payment will be issued to the common shareholders unless they are first paid. Consequently, this makes the preferred stock to be more attractive. Non-cumulative preferred stock allows the issuing company to resume paying dividends at any time without regard to the missed or past payments.

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