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 to 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'

Noncumulative is a type of preferred stock that does not entitle an investor to any missed dividends, while cumulative is a type of preferred stock that does entitle an investor to dividends that were missed. 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 option gives the bondholder the 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.

  1. Preferred Stock

    A class of ownership that has a higher claim on assets and earnings ...
  2. Cumulative Preferred Stock

    Cumulative preferred stock has a provision that says if any dividends ...
  3. Preferred Dividend Coverage Ratio

    The preferred dividend coverage ratio is the ratio that measures ...
  4. Prior Preferred Stock

    A type of preferred stock with a higher claim on assets and dividends ...
  5. Perpetual Preferred Stock

    A perpetual preferred stock is a type of preferred stock that ...
  6. Convertible Security

    A convertible security is an investment that can be changed into ...
Related Articles
  1. Investing

    Prefer Dividends? Why Not Look At Preferred Stock?

    Preferred stock is an under-used option for income-seeking investors.
  2. Managing Wealth

    Taking The Bite Out Of A Bear Market

    Find out which financial instruments will protect you from bear market volatility.
  3. Investing

    Introduction to Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  4. Investing

    Income Funds 101

    Income funds don't have to be bonds, there are plenty to choose from. Read up on the types of income funds and whether they fit your investment needs.
  5. Investing

    Charles Schwab Declares $0.08 Share Quarterly Dividend

    Charles Schwab declared a regular quarterly dividend of $0.08 a share, in line with previous quarter's payout.
  6. Investing

    How Dividends Affect Stock Prices

    Find out how dividends affect the underlying stock's price, the role of market psychology, and how to predict price changes after dividend declarations.
  7. Investing

    Is Dividend Investing a Good Strategy?

    Understanding dividends and how they generate steady income for shareholders will help you become a more informed and successful investor.
  1. 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 >>
  2. What are the advantages and disadvantages of preference shares?

    Learn about the advantages and disadvantages of preference shares for both investors and issuing companies. Read Answer >>
  3. Why would a company issue preference shares instead of common shares?

    Learn about some reasons that corporations might issue preference shares, and why investors might value them more than common ... Read Answer >>
  4. Does issuing preferred shares offer a tax advantage for corporations?

    There is no direct tax advantage to the issuing of preferred shares when compared to other forms of financing such as common ... Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center