In what order would dividends be paid on cumulative preferred stock?

Cumulative preferred stock is designed to provide shareholders with certain benefits, particularly regarding the payment of dividends. When a company issues cumulative preferred stock, it agrees to pay dividends that are accumulated if they cannot be paid in a given period. This means that if a company skips a dividend payment on cumulative preferred shares, those unpaid dividends are carried over and must be paid before any dividends can be distributed to common stockholders.

The correct order for paying dividends on cumulative preferred stock is to address any dividends that are in arrears first. This includes any missed payments from prior periods, which will be paid off before the current preferred dividends and before any payouts to common shareholders. Hence, the sequence becomes first the in arrears dividends, then the current preferred dividends, and finally the common dividends. This structure ensures that preferred shareholders receive their entitled payments before common shareholders see any dividends.

Understanding this hierarchy is crucial for investors and stakeholders, as it illustrates the relative priority of dividends within a company’s capital structure. The company has a legal obligation to pay the cumulative preferred dividends in this order, emphasizing the protective features built into cumulative preferred stock.