Before investing in a preferred stock it is important to find out if it is a cumulative or non-cumulative preferred stock.
Most preferred stocks pay dividends to the shareholders. In fact, the majority of the return associated with a preferred stock is derived from the dividend. If a company fails to pay a dividend on the preferred stock there are varying rules associated with how dividends must be paid in the future.
Cumulative Preferred Stocks
If a company does not pay a scheduled dividend on a cumulative preferred stock, then the company is required to pay the missed dividend before it can issue a dividend on its common stock.
Non-Cumulative Preferred Stock
If a company does not pay a scheduled dividend on a non-cumulative stock, it is not required to pay the missed dividend to the preferred stock shareholders before it pays a dividend to the common stock shareholders.
Non-cumulative preferred stocks typically pay a higher dividend rate than cumulative preferred stocks since shareholders of non-cumulative preferred stocks are not guaranteed to receive a missed dividend before the common stock shareholders are paid.
Preferred Stocks Today
The majority of preferred stocks available today are cumulative. Very few companies miss preferred stock payments. If a company misses a preferred stock payment it is a sign of cash flow problems, declining profits or mismanagement of the company.
Eric Scott has been a freelance writer for over four years. He specializes in business, entrepreneurship and investing. Scott received his Master of Business Administration from Loyola University with a concentration in finance and owned and operated a successful business for 10 years.