Legal Definitions - accumulative dividend

An accumulative dividend (also known as a cumulative dividend) refers to a special feature of certain types of preferred stock. If a company issues preferred stock with an accumulative dividend feature, and then fails to pay the scheduled dividend in any given period, those unpaid dividends do not disappear. Instead, they "accumulate" and become a debt that the company must pay to the preferred shareholders in the future.

Crucially, all accumulated unpaid dividends must be fully paid to the preferred shareholders before the company can pay any dividends whatsoever to its common shareholders. This feature provides an added layer of protection for preferred shareholders, ensuring they eventually receive all their promised dividend payments, even if the company experiences financial difficulties or chooses to defer payments for a period.

Here are some examples to illustrate this concept:

• Example 1: Company Financial Recovery

  Imagine "Tech Innovations Inc." has issued cumulative preferred stock. In 2022, due to unexpected market challenges, the company decides not to pay its preferred stock dividend of $5 per share. This $5 dividend is now "accumulated." In 2023, Tech Innovations Inc. has a very profitable year. Before the company can distribute any dividends to its common shareholders, it must first pay the $5 accumulated dividend from 2022, plus the current year's $5 dividend, to its preferred shareholders. This means preferred shareholders receive a total of $10 per share for 2023, covering both the missed payment and the current one, before common shareholders see any payout.

• Example 2: Acquisition Scenario

  "Green Energy Solutions" is a company with cumulative preferred stock, and it has not paid dividends for the past three years as it focused on reinvesting profits into rapid expansion. Each year's $10 preferred dividend has accumulated, totaling $30 per share in unpaid dividends. Now, a larger corporation, "Global Renewables," decides to acquire Green Energy Solutions. As part of the acquisition agreement, Global Renewables must ensure that all $30 per share of accumulated unpaid dividends are paid out to Green Energy Solutions' preferred shareholders before any acquisition proceeds are distributed to the common shareholders. This ensures the preferred shareholders' rights to their accumulated dividends are honored during the change of ownership.

• Example 3: Startup Growth and IPO

  A promising biotech startup, "BioFuture Labs," raises capital by issuing cumulative preferred stock to early investors. For five years, BioFuture Labs reinvests all its earnings into research and development, choosing not to pay any dividends. The annual preferred dividend is $2 per share, meaning $10 per share ($2 x 5 years) has accumulated. When BioFuture Labs finally goes public (an Initial Public Offering or IPO) and becomes highly profitable, it decides to start paying dividends. Before any dividends can be paid to the new common shareholders who bought stock in the IPO, BioFuture Labs must first pay the full $10 per share in accumulated dividends to its original preferred shareholders, in addition to any current preferred dividends due.