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Cumulative Dividend

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A cumulative dividend is a dividend that, if the company doesn't pay it when it is due, must be paid in future periods. For example, suppose a company issues preferred shares with a purchase price of $100 and a cumulative dividend of 5% per year, or $5. If it is unable to pay the $5 cumulative dividend to shareholders in year 1 for any reason, it must pay a $10 ($5 + $5) cumulative dividend in year 2. A cumulative dividend applies only to preferred stock, since corporations have no obligation to pay dividends to common stock shareholders. Indeed, common shareholders cannot receive any dividends at all until all of the cumulative dividend obligations are paid. Note, however, that preferred stock is issued under a variety of terms and conditions which may not include a cumulative dividend.



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