What is the Difference Between Cumulative and Non-Cumulative Preference Shares in Terms of Dividends?
In the world of finance, preference shares are a common form of ownership in a company. These shares have certain advantages, such as dividend priority. When it comes to dividends, there are two types of preference shares – cumulative and non-cumulative. In this article, we will explore the difference between these two types of preference shares and their impact on dividend payments.
Preference Shares and Dividends
Before diving into the differences, let’s first understand the concept of preference shares and dividends. Preference shares are a class of shares that give their holders preferential treatment over ordinary shareholders in terms of dividend payments and liquidation preference. Dividends, on the other hand, represent the distribution of a company’s profits to its shareholders.
Cumulative Preference Shares
Cumulative preference shares are a type of preference share where any unpaid dividends accumulate over time and must be paid before any dividends can be paid to ordinary shareholders. In simple terms, if a company fails to pay dividends in a particular year, the unpaid dividends carry forward as liabilities and must be paid in the future. Cumulative preference shareholders have the right to claim their unpaid dividends in the future.
Non-Cumulative Preference Shares
Non-cumulative preference shares, on the other hand, do not accumulate unpaid dividends. If a company fails to pay dividends to non-cumulative preference shareholders in a specific year, those shareholders have no legal right to claim the unpaid dividends in the future. The unpaid dividends are not carried forward as liabilities for the company.
Comparison of Cumulative and Non-Cumulative Preference Shares
Cumulative: Unpaid dividends accumulate and must be paid in the future.
Non-Cumulative: Unpaid dividends do not accumulate and are not payable in the future.
Conclusion
In conclusion, the key difference between cumulative and non-cumulative preference shares lies in the treatment of unpaid dividends. Cumulative preference shares accumulate unpaid dividends that must be paid in the future, while non-cumulative preference shares do not accumulate unpaid dividends.