Legal Definitions - cumulative preference share

A cumulative preference share is a type of preferred stock that guarantees its holder a preferential claim to dividends and corporate assets upon liquidation. If the corporation fails to pay dividends in a particular year or period, the unpaid dividends are carried over to the next year or period and must be paid before common shareholders receive any payment. This type of stock is also known as cumulative preferred stock.

For example, if a corporation issues cumulative preference shares with a dividend rate of 5%, and fails to pay dividends for two years, the unpaid dividends accumulate to 10%. The corporation must pay the accumulated dividends before paying any dividends to common shareholders.

Cumulative preference shares are often used by corporations to attract investors who seek a steady income stream. They provide a sense of security to investors as they are guaranteed to receive their dividends, even if the corporation experiences financial difficulties.