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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.            

Preferred stock usually pays a fixed dividend based on the stock’s par value. And preferred dividends usually come on a set schedule, so preferred shareholders know when to expect them. But that’s not always the case.

For example, ABC Corporation runs into production problems with its line of widgets after a natural disaster disrupts its suppliers. Sales fall sharply. ABC chooses to suspend dividend payments and focus on finding new suppliers who can provide the raw materials it needs. After a year, production returns to normal, and sales follow.

The company resumes paying dividends to its stockholders. But before it can pay common shareholders, ABC must pay all missed dividends that are owed to shareholders who own cumulative preferred stock.

While most preferred stock is cumulative preferred stock, there is also noncumulative preferred stock, which does not pay its holder omitted dividends. Because of this, a cumulative preferred share is worth more than a noncumulative preferred share. But cumulative preferred stock comes with uncertainty, because payments are not guaranteed on set dates.

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