Okay, you know what a dividend is. Companies generally commit to paying it when they have soooo much extra cash profit that they really don’t know what to do with the dough.
Yeah, nice place to be.
In the case of preferred stock, the dividends aren’t just…optional-ish. They operate more like bond interest. only with a catch. Dividends on preferred stock can, in fact, be halted without the company being repossessed by the debt holders. Like...in the case where the company falls on hard times. Or it wants to preserve its cash to buy a competitor. Or it just wants another jet-with-waterslide-thing.
So there are two types of preferred stock in this realm...the ones that pay cumulate dividends, and ones that don’t… cleverly named non-cumulative. Say a company has halted dividends from its preferred for 3 ½ years… and it was paying five dollars a quarter in dividends from those cumulative preferreds. Well, if it was to resume paying dividends on them, it would first have to pay all 14 quarters’ worth of dividends before it began to issue more dividends. That is, it owed 3 years times 4 quarters, or 12 quarters, plus a half year, or 2 quarters, for a total of 14, at 5 bucks a quarter a share. That's 5 times 14, or 70 bucks. Big obligation. But it has to pay that amount before it can resume dividend payments.
Why would a company have a cumulative feature in its preferred dividend obligation? Because investors forced it to do so, worried that the preferred dividends might be just summarily stopped, and then the investors would have little or no return on their investment in the preferreds. And this can be a problem for companies that have fallen on hard times. They are essentially made illiquid, in that they can’t afford to pay the back dividends on the preferreds, and they can’t raise more capital with this blight on their record of having stopped paying a divvy. Most preferred stocks are non-cumulative, and if companies decide to just stop paying them, they can…but if they do, it’s like they have kind of reneged on a handshake. And, uh…investors…talk.
So like…good luck to the company ever trying to raise capital again from the cold, cruel outside world.
Related or Semi-related Video
Finance: What is an Accumulated Dividend...9 Views
finance a la shmoop what is an accumulated dividend okay you know what
a dividend is companies generally commit to paying it when they have so much [Example of dividend meaning on a 100 dollar bill]
extra cash profit that they really don't know what to do with the dough yeah nice
place to be in the case of a preferred stock the dividends aren't just a
optional-ish they operate more like bond interest only with a catch
that is dividends on preferred stock can in fact be halted without the company
being repossessed by the debt holders like in the case where the company falls [Prize wheel lands on hard times]
on hard times or it wants to preserve its cash to buy a competitor or it just
wants another jet with a water slide thing on it well yeah it can halt its [Person slides down a jet slide]
dividend in those cases and well there are two types of preferred stock in this
realm the ones that pay cumulative dividends and the ones that don't
cleverly named non-cumulative say a company has halted dividends from its
preferred for three and a half years and it was paying five bucks a quarter in [Dividend distribution graph]
dividends from those cumulative preferred well if it was to resume
paying dividends on them it would first have to pay all back fourteen quarters
worth of dividends before it began to issue more dividends or pay them to its
preferred holders that is it owed three years times four quarters or twelve
quarters plus half a year or two quarters for a total of fourteen
quarters at five bucks a quarter a share that's five times fourteen or seventy [Formula of non-cumulative dividends]
dollars a share in back cumulative dividends big obligation but it has to
pay that amount before it can resume dividend payments why would a company
have a cumulative feature in its preferred dividend obligation well
because investors forced it to do so or they wouldn't invest they were worried [Person swipes away stacks of money]
that the preferred dividends might be just some merrily stopped and then the
investors would have little or no return on their investment in the preferred and
this can be a problem for companies that have fallen on hard times they are
essentially made illiquid in that they can't afford to pay the back dividends [Example of illiquid meaning]
on the preferreds and they can't raise more capital with this blight on their
record of having stopped paying a divvy well most [Non cumulative stock stickers appear on a table]
furred stocks are non-cumulative and if companies decide to just stop paying
them they can but if they do it's kind of like they've reneged on a handshake [Two guys giving a handshake]
and you know investors talk so like good luck to the company ever trying to raise
capital again from the cold cruel outside world yeah welcome to Wall
Street [Wall Street road sign]
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