Cumulative Dividends

Examples of Cumulative Dividends in the following topics:

• Provisions of Preferred Stock

  • Preferred shares have numerous rights which can be attached to them, such as cumulative dividends, convertibility, and participation.
  • One of these rights may be the right to cumulative dividends.
  • Preferred stock shareholders already have rights to dividends before common stock shareholders, but cumulative preferred shares contain the provision that should a company fail to pay out dividends at any time at the stated rate, then the issuer will have to make up for it as time goes on.
  • Almost all preferred shares have a negotiated, fixed-dividend amount.
  • An example of this would be tying the dividend rate to LIBOR.

• Accounting for Preferred Stock

  • Cumulative preferred stock is preferred stock for which the right to receive a basic dividend, usually each quarter, accumulates if the dividend is not paid.
  • Companies must pay unpaid cumulative preferred dividends before paying any dividends on the common stock.
  • Dividends in arrears are cumulative unpaid dividends, including the quarterly dividends not declared for the current year.
  • Also, the cumulative dividend for the current year is payable.
  • Differentiate between preferred to dividends, noncumulative, cumulative and convertible preferred stock

• Preferred Stock Rules and Rights

  • Preferred stock can include rights such as preemption, convertibility, callability, and dividend and liquidation preference.
  • Preferred stock usually carries no voting rights, but may carry a dividend and may have priority over common stock in the payment of dividends and upon liquidation.
  • Some preferred shares gain voting rights when the preferred dividends are in arrears for a substantial time.
  • The dividend is usually specified as a percentage of the par value, or as a fixed amount.
  • Preferred stock may also have rights to cumulative dividends.

• Liquidation Preference

  • A corporation's cumulative preferred dividends in arrears at liquidation are payable even if there are not enough accumulated earnings to cover the dividends.
  • Also, the cumulative dividend for the current year is payable.
  • Stock may be preferred as to assets, dividends, or both.

• Convertible Stock

  • Convertible securities can include bonds that pay interest or preferred stocks that pay dividends.
  • Preferred shares rank higher to common stock during earnings distributions, such as dividends; however, they are subordinate to bonds in terms of their claim to company assets in the event of a business liquidation.
  • The shares may also be cumulative or non-cumulative.
  • A cumulative preferred stock accumulates unpaid prior period dividends into the future, while a non-cumulative preferred loses rights to any dividends not paid in prior periods.

• Common and Preferred Stock

  • They also receive dividend payments if the firm offers them.
  • Almost all preferred shares have a negotiated, fixed-dividend amount.
  • In general, there are four different types of preferred stock: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock.
  • With cumulative preferred stock, If the dividend is not paid, it will accumulate for future payment.
  • With non-cumulative preferred stock, dividends will not accumulate if they are unpaid.

• Issuing Stock

  • The greater amount of risk is due to the fact that shares receive dividends only after preferred shareholders are paid and, in the event of a business liquidation, common stock shareholders are paid last, after creditors and preferred shareholders.
  • Preferred shares tend to pay dividends to shareholders, which can accumulate from one period to the next, and have priority over common shareholders when dividends are paid or assets liquidated.
  • Some other features associated with preferred stock include convertibility to common stock, non-voting rights, and the potential of shares to be either cumulative or non-cumulative of company dividends.

• Earnings per Share

  • The EPS formula does not include preferred dividends for categories outside of continued operations and net income.
  • If preferred dividends total $100,000, then that money is not available to distribute to each share of common stock.
  • Only preferred dividends actually declared in the current year are subtracted.
  • The exception is when preferred shares are cumulative, in which case annual dividends are deducted regardless of whether they have been declared or not.
  • Dividends in arrears are not relevant when calculating EPS.

• Dividend Payments and Earnings Retention

  • Retained earnings and losses are cumulative from year to year with losses offsetting earnings.
  • A dividend is allocated as a fixed amount per share.
  • Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a "special dividend" to distinguish it from the fixed schedule dividends.
  • Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:
  • The dividend payout ratio is equal to dividend payments divided by net income for the same period.

• Preferred Stock

  • Preferred stock usually carries no voting rights, but may carry a dividend, have priority over common stock upon liquidation and/or have other benefits.
  • Preferred stock usually carries no voting rights, but may carry a dividend and may have priority over common stock in the payment of dividends and upon liquidation.
  • The rating for preferreds is generally lower, since preferred dividends do not carry the same guarantees as interest payments from bonds, and they are junior to all creditors.
  • Some examples are prior preferred stock (highest priority), preference preferred stock, convertible preferred stock (exchangeable for common stock), cumulative preferred stock, exchangeable preferred stock, participating preferred stock, putable preferred stock, monthly income preferred stock, and non-cumulative preferred stock.