Cumulative preference shares definition

Cumulative preference shares give the holder the right to dividends that may have been missed, or reduced, in the past. Companies may pay reduced dividends, or even halt paying dividends for a time, and when they resume then cumulative preferred shareholders must receive all the dividends in arrears, before holders of common shares can receive dividends once more.

Let’s say a company issues cumulative preference shares worth £1000 each, paying out 5% annually. In year one, the economy is going strong and the company pays out its dividend in full, meaning the cumulative preferred shareholder gets £50. In year two, the economy slows and the company can only afford to pay out half the dividend. The shareholder gets £25 and is owed £25. In year three, the situation has worsened and the company halts dividend payments. The shareholder is now owed £75. In year four the economy rebounds and the company resumes dividend payments. The cumulative preferred shareholder must be paid the £75 in arrears, plus the year four dividend of £50. All the cumulative preferred shareholders must be paid before the company can pay other classes of shareholders a dividend.