Finance: What is an Accumulated Dividend?

What is an Accumulated Dividend? Accumulated dividends are dividends paid on cumulative preferred stock. They are referred to as accumulated because they are a combination of previous and current dividends, none of which have been paid to the shareholder yet.

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Transcript

00:27

that is dividends on preferred stock can in fact be halted without the company

00:32

being repossessed by the debt holders like in the case where the company falls [Prize wheel lands on hard times]

00:36

on hard times or it wants to preserve its cash to buy a competitor or it just

00:41

wants another jet with a water slide thing on it well yeah it can halt its [Person slides down a jet slide]

00:46

dividend in those cases and well there are two types of preferred stock in this

00:50

realm the ones that pay cumulative dividends and the ones that don't

00:54

cleverly named non-cumulative say a company has halted dividends from its

01:00

preferred for three and a half years and it was paying five bucks a quarter in [Dividend distribution graph]

01:05

dividends from those cumulative preferred well if it was to resume

01:09

paying dividends on them it would first have to pay all back fourteen quarters

01:15

worth of dividends before it began to issue more dividends or pay them to its

01:20

preferred holders that is it owed three years times four quarters or twelve

01:26

quarters plus half a year or two quarters for a total of fourteen

01:29

quarters at five bucks a quarter a share that's five times fourteen or seventy [Formula of non-cumulative dividends]

01:33

dollars a share in back cumulative dividends big obligation but it has to

01:38

pay that amount before it can resume dividend payments why would a company

01:42

have a cumulative feature in its preferred dividend obligation well

01:46

because investors forced it to do so or they wouldn't invest they were worried [Person swipes away stacks of money]

01:50

that the preferred dividends might be just some merrily stopped and then the

01:54

investors would have little or no return on their investment in the preferred and

01:58

this can be a problem for companies that have fallen on hard times they are

02:02

essentially made illiquid in that they can't afford to pay the back dividends [Example of illiquid meaning]

02:06

on the preferreds and they can't raise more capital with this blight on their

02:10

record of having stopped paying a divvy well most [Non cumulative stock stickers appear on a table]

02:13

furred stocks are non-cumulative and if companies decide to just stop paying

02:18

them they can but if they do it's kind of like they've reneged on a handshake [Two guys giving a handshake]

02:23

and you know investors talk so like good luck to the company ever trying to raise

02:28

capital again from the cold cruel outside world yeah welcome to Wall

02:33

Street [Wall Street road sign]