Cumulative Preferred Stock

When a corporation is experiencing financial difficulties it has the right to reduced or even suspend payment of its dividends. Shareholders do not receive the amount promised when they purchased the stock, and most never see this money again.

If and when the company pulls itself out of danger, it may raise or resume dividend payments. Preferred share holders are the first to receive these payments, followed by common shareholders. Investors who purchased cumulative preferred stock, however, receive not only these refreshed dividends, but also the full amount that was unpaid while the company was in trouble. Cumulative preferred stock is a safer investment because of this guarantee, and so it is almost always issued with a lower interest rate than straight preferred stock. Greater risk means greater reward.