Question

What is the difference between cumulative and noncumulative preferred stock?

Answer 1

Preference shares are entitled to payment of dividend before the payment of dividends to common stockholders.

But, if preferred dividends are not paid in any year, whether the right to receive the dividend not paid in an earlier year [arrear dividend] in a subsequent year depends on whether the preferred stock is non-cumulative or cumulative.

If the preferred stock is non-cumulative, the dividends not paid by the company in any year are lost for ever. There is not right to carry the claim forward in subsequent years.

But, in the case of preferred stock which is cumulative, the unpaid dividends in any year are carried forward and added to the preferred dividends that become due in the next year, and it goes on till the entire preferred dividends so carried forward are paid. The claim for carried forward dividends has preference over the current dividends on common shares.