What Are Accumulated Dividends? How They Affect Cumulative Preferred Stock

What Is an Accumulated Dividend?

An accumulated dividend is an unpaid dividend connected to cumulative preferred stock. These dividends accumulate when a company can’t pay them in the current period. They’re carried forward from previous periods. This is usually because dividend-issuing companies are not financially equipped to pay their shareholders.

Shareholders of cumulative preferred stock are prioritized over other shareholders for these payments.

Understanding Accumulated Dividends

Some companies share their success with shareholders by making distributions that are paid through their earnings. These distributions are called dividends and are usually paid out quarterly in cash or they may be reinvested into additional stock. Dividends of preferred stock can fall into two classes: noncumulative and cumulative, where the former is not guaranteed—unlike the latter. Cumulative shares pay out accumulated dividends to shareholders.

Accumulated dividends may be created when some companies are not in a financial position to pay a dividend during certain years. This means they continue to add up, which is why they’re also often known as accrued dividends. Having said that, they must be paid before any other dividends can be distributed. Accumulated dividends represent an obligation for the company and their sum is listed as a current liability on its balance sheet until paid, which is normally within a year.

How companies address accumulated dividends can vary. For example, a company may enter an investor’s accumulated dividend payable amount into its payroll system at the time of vesting, with the dividend income included in the individual’s Form W-2 that year. There maybe be taxes to be deducted from the sum of dividend payment income.

The actual dividend payment issued, minus taxes would appear in a paycheck after the investors restricted stock awards. The disbursement of that payment could be as soon as possible after the restricted stock awards vest.

Key Considerations for Accumulated Dividends

As noted above, preferred stock dividends can be either noncumulative or cumulative. Noncumulative shares are entitled to dividends only if they are declared. As such, they aren’t guaranteed.

But some investors may want a guaranteed return on their preferred shares. These returns are paid out on cumulative preferred stocks. These shares allow investors to earn dividends regardless of the company’s ability to pay them immediately or in the future.

How Accumulated Dividends Affect Insurance

From an insurance perspective, accumulated dividends can affect the payout for some policies. Insurers may pay regular dividends to certain life insurance policyholders. The interval may be annual or certain milestone years for the dividends to be paid.

Upon the policyholder’s death, the insurer usually pays the face value of the death benefits for whole life insurance policies. However, if it is a participating policy, which pays regular dividends to the policyholder, the accumulated dividends would be added to and increase the death benefit that is paid.

Accumulated dividends for participating insurance policies might also see the policyholder use the dividend values for paying their premiums. If such an arrangement is planned properly, it might be possible for the policyholder to pay their annual premiums without the use of cash.