What Is a Cumulative Dividend?

A cumulative dividend is a right associated with certain preferred shares of a company. A fixed amount or a percentage of a share's par value must be remitted periodically to shareholders who own these shares without regard to the company's earnings or profitability. A cumulative dividend must be paid, whereas a regular dividend, also called a non-cumulative dividend, may or may not be shareholders at the company's discretion.

Key Takeaways

  • Cumulative dividends are required dividend payments made by a firm to its preferred shareholders.
  • Cumulative dividends must be paid, even if they are paid at a later date than originally stated. If a firm is unable to pay the dividend on time, they must accumulate sufficient funds until it can make the payment.
  • Cumulative dividends must be paid in-full before any dividends are paid to holders of common stock.

How Cumulative Dividends Work

Preferred shares are a hybrid between equity and financing. While the various rights associated with the shares vary greatly from company to company, including voting rights, dividend rate and order of preference in a liquidation, the right to a cumulative dividend ensures the shareholder of a certain return on investment whether or not the company is profitable.

Cumulative dividends must be paid by the issuer of preferred stock either at the due date or at a later date, if necessary. If a company cannot pay its cumulative dividend obligation when it is due, it is still responsible for paying it in the future—possibly with additional interest—and it must fulfill this obligation before it can award ordinary dividends to common shareholders.

Cumulative dividends are intended to ensure investors a minimum return on their investment in the company. Cumulative dividend provisions may contain limitations, such as being payable only if the company liquidates. A company that issues cumulative preferred stock must disclose any accumulated, unpaid dividends in its financial statements.

Preferred shares usually pay cumulative dividends, but not always. Check the issue's prospectus to be sure.

In a sense, the cumulative dividend is akin to an interest payment on the capital invested by the shareholder to acquire the shares, hence the financing element of these shares. However, because they are shares and not loans to the company, there is an equity component as well.

Payment of Cumulative Dividends

In general, payment of cumulative dividends comes before the company's common shareholders but after the company's creditors. As such, there is an element of risk for the shareholders. Dividends can be monthly or quarterly and the amounts payable are found in the company's articles of association and, for public companies, in their prospectuses.

For example, Safe Bulkers, Inc., an international provider of marine dry bulk transportation services paid a cash dividend of $0.50 per share on its 8.00% Series B cumulative redeemable perpetual preferred shares for the period from Jan. 30, 2016 to April 29, 2016, as well as on several others.

If a company is financially unable to pay the dividend, the dividends accumulate until it has sufficient cash to make the payment. In such cases, companies must advise their shareholders of the problem. For example, in Nov. 2015, Yuma Energy, Inc. announced that it was suspending the monthly cash dividend payment on the company's 9.25% Series A cumulative redeemable preferred stock beginning with the month ending Nov. 30, 2015, due to the depressed commodity price environment which adversely affected the company's cash flows and liquidity.