Features of Cumulative Dividend Rights

Preferred Stock
A business organization issues equity securities and debt securities in order to raise its capital. The preferred stocks are the combination of equity stocks and debt instruments. Preferred stock is basically considered as stock having higher class of ownership in the business organization. The preference stockholders have the right to exercise the claim on assets of the business organization on a priority basis. These preference stocks sometimes come with cumulative dividend rights. The cumulative dividend rights become the additional feature of the preference stocks, which states that the dividend must be paid to the preferred stockholders before any dividend payments are made to the common stockholders.

Types of Preferred Stock
Preferred stocks are categorized into different types. Some preferred stock types are cumulative preferred stock, non-cumulative preferred stock, redeemable preferred stock, irredeemable preferred stock, etc.

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Cumulative Preferred Stock – Cumulative stock is that type of preferred stock that allows the company to pay the dividend in arrears. Sometimes when the company is financially unstable to pay dividends, such dividends can be paid cumulatively in the next year. Thus, dividends to cumulative preference stockholders should be paid either on the due date or later.

Non-Cumulative Preferred Stock – Non-Cumulative stock is that type of preferred stock that does not mandatorily allow the company to pay the dividend in arrears.

Redeemable Preferred Stock: The redeemable preferred stock allows the company to purchase the preferred stock back the stockholders at a predetermined price.

Irredeemable Preferred Stocks: The irredeemable preferred stocks can only be redeemed by the company when the company has decided to wind up or at the time of liquidation of the company.

Features of Cumulative Dividend Rights of Preference Stockholders
The cumulative dividend rights are given to the stockholders of the business organization. The cumulative dividends can be calculated by multiplying the dividend rate with the par value of the stocks. In this case, the par value can be defined as the face value of the stocks, and the dividend rate may be defined as the estimated rate of dividends. Some of the main features of the cumulative dividends are explained below:

Fixed dividend payment – One of the main features of the cumulative dividend is that the dividend payments are fixed. Therefore, when a cumulative dividend is given, the stockholders will be paid a fixed amount of dividend. This fixed payment of dividends depends upon the dividend rate and the face or par value of the stocks. So, this feature states that no matter whether the business organization earns a profit or not, the dividend payment has to be made to the preferred stockholders on the due date or later.

Seniority in dividend payments – The other feature of the cumulative dividend is that it gives preference to the stockholders having such dividend rights in case of dividend payments. This feature states that the preferred stockholders with cumulative dividend rights must be paid before any payments are made to the common stockholders.

Accumulation of dividend payments – The other feature of cumulative dividend rights is that if any business organization is unable to pay the cumulative dividend on time, they can pay such dividends at some later date. In such cases, the dividend gets accumulated. Such accumulation is allowed in the case of cumulative dividends. Therefore, the cumulative dividends get accumulated until the business organization completely settles the outstanding amount.

Secured investment- Since there is surety of return in the form of dividend, cumulative preference stocks are considered as secured investment from the investors point of view.

Cheaper source for corporations- Since cumulative preference stock holders are provided preference and fixed return on investment, rate of dividend is comparatively lower as it is less risky.

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