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Preferred shares are a hybrid form of equity that includes debt-like features such as a guaranteed dividend. The four main types of preference shares are callable shares, convertible shares, cumulative shares, and participatory shares.
When a corporation has only one class of stock, it is identified as common stock.
Whether a preferred stock is cumulative or straight (non-cumulative) determines if the issuer must make up skipped payments. If it's cumulative, the issuer must pay missed dividends to preferred stockholders at some point. If it's straight, the issuer will not make up skipped dividends.
When preferred stock is cumulative and the directors either do not declare a dividend to preferred stockholders or declare one that does not cover the total amount of cumulative dividend, the unpaid dividend amount is called dividend in arrears.
Cumulative preferred stock provides consistent income to shareholders. It ensures that if dividends are not paid in a particular period, they accumulate and must be paid in the future. This feature can attract risk-averse investors who seek reliable dividend payments and a degree of security.
Preference Shares2 can be cumulative or non-cumulative. The former gives shareholders the right to receive cumulative dividend payouts from the company even if they are not profitable. That dividend payout can be made at some later point of time.
What Is Cumulative Preferred Stock? Cumulative preferred stock is a type of preferred stock with a provision that stipulates that if any dividend payments have been missed in the past, the dividends owed must be paid out to cumulative preferred shareholders first.
The significant advantage to preferred stock is they typically have a specified dividend rate which could be comparable to what bonds are paying at the time.