Unlocking the Power of Cumulative Dividends: What Investors Need to Know

Adam Hayes, Ph.D., CFA, is a seasoned financial writer with over 15 years of experience on Wall Street as a derivatives trader. Combining deep expertise in economics and behavioral finance, Adam holds a master's degree in economics from The New School for Social Research and a Ph.D. in sociology from the University of Wisconsin-Madison. He is a CFA charterholder and holds FINRA Series 7, 55 & 63 licenses. Adam currently conducts research and teaches economic sociology and finance studies at Hebrew University in Jerusalem.

Understanding Cumulative Dividends

Cumulative dividends represent a special entitlement granted to holders of certain preferred shares. These dividends guarantee a fixed payment—either a set amount or a percentage of the share's par value—that must be paid regularly to the shareholders, regardless of the issuing company's profitability or earnings. Unlike non-cumulative dividends, which companies may choose to skip, cumulative dividends accrue until fully paid.

Key Insights

• Cumulative dividends are mandatory payments made to preferred shareholders.
• If dividends are missed, they accumulate and must be paid later.
• A company must settle all accumulated dividends before distributing dividends to common shareholders.
• This mechanism protects investors by ensuring a minimum return even during financial downturns.

How Cumulative Dividends Function

Preferred shares blend characteristics of both equity and debt. While features such as voting rights and liquidation priority vary widely, cumulative dividends secure preferred shareholders a dependable return, independent of the company's profit status. If a company can’t pay dividends on schedule, the unpaid amounts accumulate, potentially with added interest, and must be paid before any dividends go to common stockholders.

This structure effectively guarantees investors a baseline income, reinforcing the financing nature of preferred shares. However, since these are shares rather than loans, they still carry an equity stake in the company.

Important Consideration

Not all preferred shares guarantee cumulative dividends. Investors should carefully review the prospectus or issuance documents to confirm dividend rights.

Dividend Payment Priorities and Obligations

Cumulative dividends take precedence over common stock dividends but come after creditor claims. Payment schedules—monthly, quarterly, or otherwise—and amounts are typically detailed in a company’s articles of association or public prospectus.

For instance, Safe Bulkers, Inc., a global marine dry bulk transportation firm, regularly paid $0.50 per share on its 8.00% Series B cumulative redeemable perpetual preferred shares, illustrating a commitment to steady dividend distribution.

However, if a company faces financial challenges, dividend payments may be deferred and accrue until funds become available, with transparent communication to shareholders.

For example, Yuma Energy, Inc. suspended its monthly dividend on 9.25% Series A cumulative redeemable preferred stock in late 2015 due to unfavorable commodity prices affecting its cash flow and liquidity.

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