Accumulated Dividend

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.