How Does a Cumulative Preferred Stock Work?

Owning cumulative preferred stock can provide you with a unique advantage as an investor. Here are the basics of cumulative preferred stock and how it can benefit you.

Cumulative Preferred Stock

Cumulative preferred stock is a type of stock that entitles you to be paid dividends before any other classes of stock. Therefore, if it is determined that a company owes dividends, they will first have to pay the holders of cumulative preferred stocks before anyone else can be paid.

How It Works

Most of the time, corporations will pay dividends at regular intervals. Paying dividends on a quarterly basis is common. However, when a company goes through bad financial times, they might decide to postpone paying any dividends and focus on the business. After a certain amount of time, they get things back to normal and wish to start paying dividends again. When this happens, they will make up all of the previously skipped dividend payments at once to the cumulative preferred stockholders.

How It Affects Investors

This type of stock can be very beneficial to you. When you purchase this stock, you know that you will be entitled to any dividend payments as long as the company stays in business. Other classes of stockholder are not entitled to this benefit.

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