Legal Definitions - cumulative preferred stock

Definition: Cumulative preferred stock is a type of stock that guarantees its holders a fixed dividend payment before any dividends are paid to common stockholders. If the company fails to pay the dividend in any given year, the unpaid dividends accumulate and must be paid before any future dividends can be paid to common stockholders.

Example: Company XYZ issues cumulative preferred stock with a dividend rate of 5%. If the company earns a profit and decides to pay dividends, it must first pay the 5% dividend to the holders of cumulative preferred stock before any dividends can be paid to common stockholders. If the company fails to pay the dividend in any given year, the unpaid dividends accumulate and must be paid before any future dividends can be paid to common stockholders.

Explanation: Cumulative preferred stock is a way for companies to attract investors who want a guaranteed dividend payment. The example illustrates how holders of cumulative preferred stock are entitled to receive their dividend payment before any dividends are paid to common stockholders. It also shows how unpaid dividends accumulate and must be paid before any future dividends can be paid to common stockholders.