What do investors receive from cumulative preferred stock when dividends are missed?

What do investors receive from cumulative preferred stock when dividends are missed?

• A. A partial payment
• B. No payment
• C. Accrued dividends
• D. A bonus dividend

Answer: (C)

Cumulative preferred stock is designed to provide a safety net for investors in the event that dividends are not paid in a given year. When dividends are missed on cumulative preferred shares, the unpaid amounts accumulate and must be paid before any dividends can be distributed to common shareholders. This means that investors are entitled to receive accrued dividends, which represent the total amount of missed payments. This characteristic makes cumulative preferred stock attractive to investors who wish to have some level of assurance regarding income even during tough market conditions. Once the issuing company resumes dividend payments, it will need to settle the accrued dividends owed to the holders of those cumulative preferred shares before any distributions to common stockholders occur. This is a crucial aspect of cumulative preferred stock, reinforcing the idea that dividends are a priority obligation for the issuing company.

Cumulative preferred stock is designed to provide a safety net for investors in the event that dividends are not paid in a given year. When dividends are missed on cumulative preferred shares, the unpaid amounts accumulate and must be paid before any dividends can be distributed to common shareholders. This means that investors are entitled to receive accrued dividends, which represent the total amount of missed payments.

This characteristic makes cumulative preferred stock attractive to investors who wish to have some level of assurance regarding income even during tough market conditions. Once the issuing company resumes dividend payments, it will need to settle the accrued dividends owed to the holders of those cumulative preferred shares before any distributions to common stockholders occur. This is a crucial aspect of cumulative preferred stock, reinforcing the idea that dividends are a priority obligation for the issuing company.