Cumulative Preferred Stock Law and Legal Definition

Cumulative preferred stock is a type of preferred stock that must receive dividends in full before common shareholders may receive any dividend. Generally a preferred stock will have a fixed dividend yield based on the par value of the stock. This dividend is paid out at set intervals, usually quarterly, to preferred holders. If a company runs into some financial problems and is unable to meet all of its obligations, it can suspend its dividend payments and focus on paying the business-specific expenses. However once the company tides over the trouble and starts paying out dividends again, it will first have to pay back all of the dividends that are owed to preferred share holders. The dividends that are omitted are carried over to the next year or period and must be paid before the common shareholders receive any payment.