Accumulated Dividend
An accumulated dividend refers to a dividend payment that a company owes to its preferred shareholders but has not yet paid. Preferred shares often come with a fixed dividend rate, which is typically paid quarterly or annually. If a company faces financial difficulties or chooses to allocate its earnings elsewhere, it may defer or not pay the preferred dividends in the short term.
Accumulated dividends are unique to preferred stock because preferred shareholders have a priority claim on dividends compared to common shareholders. In cases where the company’s board of directors decides to skip or defer preferred dividend payments, those unpaid dividends accumulate and must be paid before any dividends can be paid to common shareholders. This feature is known as “cumulative dividends” and is present in cumulative preferred shares.
It is essential to note that not all preferred shares have cumulative dividend rights. Non-cumulative preferred shares do not accumulate unpaid dividends, and shareholders will not receive any missed payments.
If a company eventually decides to pay the accumulated dividends, it will distribute the payments to the preferred shareholders first, settling any unpaid dividends from prior periods before issuing new dividend payments to common shareholders. Additionally, in the event of a company’s liquidation, preferred shareholders with accumulated dividends have a priority claim on the company’s assets over common shareholders.
Example of an Accumulated Dividend
Let’s say XYZ Company has issued cumulative preferred shares with a 6% annual dividend rate, and each share has a par value of $100. This means that each preferred shareholder should receive a $6 dividend per share each year ($100 * 6%).
Now, assume that XYZ Company faces financial difficulties and decides to skip the dividend payments for preferred shareholders for two years. In this case, the accumulated dividends for each preferred share would be:
Accumulated Dividends = Dividend Rate * Par Value * Number of Years Deferred Accumulated Dividends = 6% * $100 * 2 years = $12
After two years, the company’s financial situation improves, and the board of directors decides to pay the accumulated dividends. Preferred shareholders would receive the $12 accumulated dividend per share before any dividends are paid to common shareholders.
Once the accumulated dividends are paid, preferred shareholders would start receiving their regular annual dividend of $6 per share again. Any future dividend payments to common shareholders would be subject to the preferred shareholders receiving their regular dividend payments first.
