Definition of Cumulative Preferred Stock

A cumulative preferred stock is a type of preferred stock that gives the holder a mandatory right to receive all previously unpaid or skipped preferred dividends before any other is paid. Just like bondholders have a priority right over other creditors, the preferred stockholders have this right to receive all arrears that have accumulated and also the current dividend before other preferred shareholders and ordinary shareholders are compensated.

Assume a company has 5000 preferred shares outstanding with a par value of $50,000 that pays a fixed dividend of 8% on par value ($4,000). Five years ago the company paid only half of the dividends due to recession, and after that, no dividends were paid for consecutive four years. The current year was the first year after the recession and the company made high profits so preferred shareholders will receive $22,000 ($2,000 +$4,000*4 years + $4,000 a current year).