In the context of the stock market, cumulative is a type of preferred stock.
Preferred stocks ensure that holders are prioritized when dividends are distributed. When companies encounter financial difficulty, they may delay the payout of dividends. Once the company’s financial condition improves, preferred stockholders receive their payouts before dividends are distributed to common stockholders.
Although it may initially seem as if preferred stocks offer more advantages than common stocks, this is not necessarily true. Common stocks also afford certain advantages to stockholders, such as voting rights. Preferred stocks do not usually include this provision.
Holders of cumulative preferred stocks are guaranteed that, despite the issuer’s inability to issue payouts for any reason at a particular time, dividends will add up until the company’s financial condition improves and payouts are distributed. Although the investor receives the money at a later date, he does not lose anything. Also, even if payments were due much earlier, companies often date these depending on when they were actually distributed. By doing so, investors do not have to make amendments to previously-filed tax returns.
Most preferred stocks are cumulative. However, companies also issue non-cumulative preferred stocks, which do not provide for the accumulation of dividends which have not been paid. The only advantage this type of stock carries with it is the preferential status non-cumulative preferred stockholders have when dividends are actually paid.
