Accumulated preferred stock allows issuers to delay dividend payments under certain conditions. Shareholders of this stock have advantages over common stockholders, including receiving past and present dividend payments before common shareholders. The suspension of dividend payments is temporary, and accumulated dividends do not incur tax liability until received.
Accumulated preferred stock is a form of preferred stock that allows the issuer of the stock to withhold or omit dividend payments under certain conditions. Although the dividend payment date may pass, this does not mean that the investor will lose the dividend entirely. Instead, dividend payments will accumulate until such time as the issuer determines that circumstances have changed and the dividends can be distributed to shareholders.
One of the most common reasons for delaying dividend payments on accumulated preferred stock is the poor performance of the corporation that issued the stock. When earnings generated during the period do not live up to projections, the company may soon experience a period of low cash on hand. Depending on the terms and conditions related to the issuance of the shares, the company may inform shareholders that dividend payments scheduled for the next quarter will be skipped.
Shareholders who own accumulated preferred stock have a couple of advantages over investors who own common stock. When the company begins issuing dividend payments again, each investor holding shares of the stock will receive past and present dividend payments before any dividend payments are issued to shareholders with common shares.
A second benefit is that the holder of the accumulated preference shares is protected when the board of directors suspends the payment of dividends. While this will affect investors who own common shares, these holders can still claim any and all dividends earned up to the date of the board action.
The temporary suspension of making dividend payments is not unusual. Generally, the suspension will not last more than a couple of pay periods before dividend payments resume. Meanwhile, investors with accumulated preferred stock continue to accumulate dividends in their accounts, even though no payments are currently being made. Once the issuing corporation begins issuing payments again, the investor can expect the missed payments to catch up in subsequent payment cycles.
It is important to remember that even though dividends are credited to the investor’s account, there is no tax liability until dividend payments are actually received. For this reason, corporations that issue cumulative preference shares generally have the practice of dating payments, so they fall in the fiscal year where the payments are actually issued, rather than delaying the payments. This means that the investor does not have to file amended returns to account for stock dividends earned in prior periods and possibly incur a penalty.
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