Cumulative Dividend: A Comprehensive Guide to Its Legal Definition
Definition & meaning
A cumulative dividend is a type of dividend that is owed on preferred shares of a company. This dividend must be fully paid to preferred shareholders before any dividends can be distributed to common shareholders. If the company does not have sufficient earnings to pay the dividend when it is due, the unpaid amount accumulates. This means that the company is obligated to pay the cumulative dividends in the future, as specified in its contract, charter, or bylaws.
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Cumulative dividends are primarily relevant in corporate law, particularly in the context of preferred stock. They are important for investors who hold preferred shares, as these dividends provide a level of financial security. Users may encounter cumulative dividends in various legal documents, including corporate charters and bylaws. Understanding this term can be crucial for investors and companies alike, especially when managing dividend payments and shareholder rights.
Key Legal Elements
Real-World Examples
Here are a couple of examples of abatement:
(Hypothetical example) A company issues preferred shares with a cumulative dividend of five percent. In the first year, the company does not have enough earnings to pay the dividend. In the second year, the company earns sufficient profits and must pay the accumulated dividend from the previous year, in addition to the current year's dividend.
Comparison with Related Terms
Term
Definition
Key Differences
Cumulative Dividend
A dividend that accumulates if not paid when due.
Must be paid before common dividends; accumulates over time if unpaid.
Non-Cumulative Dividend
A dividend that does not accumulate if not paid.
Unpaid dividends are lost; shareholders do not have a right to future payments.
Preferred Dividend
A dividend paid to preferred shareholders before common shareholders.
May or may not be cumulative; refers to the class of stock rather than the payment structure.
Common Misunderstandings
What to Do If This Term Applies to You
If you are a preferred shareholder and believe you are owed cumulative dividends, review the company's charter and bylaws to understand your rights. You may also want to consult with a financial advisor or legal professional to explore your options. For those looking to manage similar issues, US Legal Forms offers ready-to-use legal templates that can help you navigate the process effectively.
Quick Facts
Type: Preferred stock dividend
Payment Priority: Must be paid before common stock dividends
Accumulation: Yes, if not paid when due
Legal Documentation: Governed by company charter and bylaws
Key Takeaways
FAQs
The unpaid dividends accumulate and must be paid in the future when the company has sufficient earnings.
They are not guaranteed, but if specified, they must be paid before any dividends to common shareholders.
Check the companyâs charter or bylaws, which outline the terms of the preferred shares.
