Dividends in arrears relate to certain preferred dividends. Companies pay dividends by declaring a dividend and distributing the dividend later on the date of payment. Without a dividend declaration, a company would not pay either common or preferred dividends for the period. While any missed common dividends are simply lost, certain omitted preferred dividends are marked as in arrears, and companies may pay those from later dividend distributions.
To qualify as dividends in arrears when unpaid, the dividends must be for the kind of preferred stock that has the so-called cumulative feature. Companies issue different kinds of preferred stocks to meet various investor needs. To attract certain investors, companies have developed the cumulative preferred stock that allows the accumulation of any undeclared preferred dividends from prior periods and the preferential distribution in later periods before any new dividends and common dividends.
Companies have no obligation to declare a dividend, not even for preferred stock. Companies carry out their dividend policies based on earnings conditions and investment needs. When a company didn’t declare a dividend for the current earnings period, it had decided it would not pay any dividends to shareholders. Sometimes companies may pay only preferred dividends, but no preferred dividends are guaranteed. For preferred stocks that are not cumulative, their shareholders don’t have any recourse to make any unpaid dividends as in arrears.
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Dividends in Arrears
Dividends in arrears are the amount of previously unpaid dividends accumulated under the cumulative preferred stock. Any time a company doesn’t declare preferred dividends for shareholders of cumulative preferred stock, the dividends are counted and recorded as in arrears for receiving possible future payments. However, dividends in arrears are not a liability for companies. Companies may pay them back later or may pay part of them over time or may not pay them at all for any period they choose. Dividends in arrears only reinforce the preferential treatment that cumulative preferred shareholders have when companies do declare a dividend.
After a company declares a dividend, dividend distribution first goes to dividends in arrears if the company has issued cumulative preferred stock and the stock has accumulated unpaid dividends. Depending on the amount of dividends a company has declared, common shareholders may not get their shares. The company must first pay off the total dividends in arrears, then pay any current preferred dividends and last pay common shareholders. If the declared dividends are less than the dividends in arrears or the amount needed to pay out all current dividends, any unpaid current dividends are added to the existing dividends in arrears.