What Is an Accumulated Dividend?
An accumulated dividend is a dividend on a share of cumulative preferred stock that has not yet been paid to the shareholder. Accumulated dividends are the result of dividends that are carried forward from previous periods. Shareholders of cumulative preferred stock will receive their dividends before any other shareholders.
Understanding Accumulated Dividends
Preferred stock can either be "non-cumulative," which is traditionally the case, or "cumulative" when it comes to dividends. Non-cumulative shares are entitled to dividends only if dividends are declared. Some investors may want a guaranteed return on a preferred stock. A cumulative preferred stock allows the investor to earn dividends regardless of the company's ability to pay them immediately or in the future.
In some instances, when some companies are not in a financial position to pay a dividend during a certain year, accumulated dividends are created. These dividends must be paid before any other dividends can be paid. Accumulated dividends represent an obligation for the company and their sum is listed as a liability on its balance sheet until paid.
- An accumulated dividend is a dividend on a share of cumulative preferred stock that has not yet been paid to the shareholder.
- Accumulated dividends represent an obligation for the company and their sum is listed as a liability on its balance sheet until paid.
- Shareholders of cumulative preferred stock will receive their dividends before any other shareholders.
Ways Accumulated Dividends Are Paid to Investors
How companies address accumulated dividends can vary. For example, a company at the time of vesting might enter an investor’s accumulated dividend payable amount into its payroll system, with the dividend income to be include in their W-2 that year. There maybe be taxes to be deducted from the sum of dividend payment income.
The actual dividend payment issued, minus taxes, would appear in a paycheck after the investors restricted stock awards. The disbursement of that payment could be “as soon as possible” after the restricted stock awards vest.
Accumulated Dividends and Insurance
From an insurance perspective, in a separate and different context, accumulated dividends can affect the payout for some policies. Insurers might pay regular dividends to participating life insurance policyholders. The interval may be annual or certain milestone years for the dividends to be paid. Upon the policyholder’s death, usually the insurer pays the face value of the death benefits for whole life insurance policies. However, if it is a participating policy, which pays regular dividends to the policyholder, the accumulated dividends would be added to and increase the death benefit that is paid.
Accumulated dividends for participating insurance policies might also see the policyholder use the dividend values for paying their premiums. If such an arrangement is planned properly, it might be possible for the policyholder to pay their annual premiums without the use of cash.