Noncumulative

What is 'Noncumulative'

Noncumulative describes a type of preferred stock that does not pay the stockholder any unpaid or omitted dividends. Preferred stock shares are issued with a stated dividend rate, which may be a stated dollar amount or a percentage of the par value. If the corporation chooses not pay dividends in a given year, the investor does not have the right to claim any of the unpaid dividends in the future.

BREAKING DOWN 'Noncumulative'

When investors purchase stock, they have certain rights as shareholders, including the right to a dividend (if the company has sufficient earnings) and voting rights in certain situations.

The Differences Between Common and Preferred Stock

Companies may issue common and preferred stock. Several features of preferred stock make it more attractive to an investor than common stock. Preferred stock is issued with a stated dividend rate, and preferred shareholders are paid dividends before common stockholders, if the company generates earnings for the year. If the company decides to liquidate and sell its assets, preferred shareholders have a claim on any remaining assets that is superior to common shareholders.

How Noncumulative Preferred Stock Works

If an investor owns cumulative preferred shares, he is entitled to any missed or omitted dividends. If, for example, ABC Company does not pay the $1.10 annual dividend to its cumulative preferred stockholders, they are entitled to collect this dividend at some point in the future. If the preferred shares are noncumulative, the shareholders never receive the missed dividend of $1.10. This is why cumulative preferred shares are more valuable than noncumulative preferred shares.

Factoring in Convertible Bonds

Corporate bonds may be issued with a conversion feature, which means that the bond can be converted into a specific number of shares of either common stock or preferred stock shares. A conversion options gives the bondholder to opportunity to convert a debt investment into an equity security.

Assume, for example, that an investor owns a $1,000 par amount corporate bond that can be converted into 20 shares of preferred stock, and the bond's market value is $1,050, while the stock is selling at $60 per share. If the investor converted into preferred stock, he would own securities with a total market value of $1,200, compared with a $1,050 bond. If the investor's goal is to earn income, he may keep the bond and not convert, but an investor who is interested in some growth may convert into the equity security.

RELATED TERMS
  1. Preferred Dividend

    A dividend that is accrued and paid on a company's preferred ...
  2. Preference Shares

    Company stock with dividends that are paid to shareholders before ...
  3. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  4. Accumulated Dividend

    A dividend on a share of cumulative preferred stock that has ...
  5. Cumulative Preferred Stock

    A type of preferred stock with a provision that stipulates that ...
  6. Convertible Preferred Stock

    Preferred stock that includes an option for the holder to convert ...
Related Articles
  1. Investing

    What is Cumulative Preferred Stock?

    Cumulative preferred stock is a type of stock that stipulates any skipped or omitted dividends must be paid to its holders before common shareholders can receive dividends.
  2. Investing

    A Primer On Preferred Stocks

    Offering both income and relative security, these uncommon shares may work for you.
  3. Investing

    What are Preference Shares?

    Preference shares, also referred to as preferred shares, are equity shares that give the shareholders certain rights ahead of common shareholders. For instance, when the corporation declares ...
  4. Investing

    The Advantages of Preferred Dividends

    Preferred dividends are cash distributions a company pays on its preferred shares.
  5. Investing

    What is Convertible Preferred Stock?

    Convertible preferred stock is preferred stock that can be converted into common stock as of a predetermined date at a specified ratio.
  6. Investing

    An Example of Dividends in Arrears

    Learn about the concept of dividends in arrears and which shares of stock guarantee payment of accrued dividends even if the company doesn't turn a profit.
  7. Trading

    Preferred Stocks versus Bonds: How to Choose

    What is the difference between corporate bonds and preferred stock? The following are a list of pros and cons for each investment.
  8. Trading

    What You Need To Know About Preferred Stock

    Curious about preferred shares? Here's what you should know about these bond-like instruments.
  9. Markets

    The Different Between Preferred and Common Stock

    Preferred and common stocks are different in two key ways.
  10. Personal Finance

    Taking The Bite Out Of A Bear Market

    Find out which financial instruments will protect you from bear market volatility.
RELATED FAQS
  1. Why would someone opt for a noncumulative preferred share?

    As per my understanding, preferred share holders can be cumulative or noncumulative. While a cumulative share has the security ... Read Answer >>
  2. What is the difference between preference and ordinary shares?

    Learn about the main differences between preference and ordinary shares including how dividends are paid for both types of ... Read Answer >>
  3. How does preferred stock differ from company issued bonds?

    Discover the primary differences between preferred stock and corporate bonds, two income-generating investment vehicles issued ... Read Answer >>
  4. What are some examples of preferred stock, and why do companies issue it?

    Understand the difference between preferred stock and common stock, and learn the primary reasons why companies issue preferred ... Read Answer >>
  5. How are preferred stock dividends taxed?

    Discover the intriguing debt and equity characteristics of preferred stock, and learn about how preferred stock dividends ... Read Answer >>
  6. What is common stock and preferred stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ... Read Answer >>
Hot Definitions
  1. Poison Pill

    A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make ...
  2. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  3. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  4. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  5. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  6. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
Trading Center