ContractsCounsel Logo
Home Types of Contracts Cumulative Preferred Stock

Cumulative Preferred Stock

Jump to Section

A cumulative preferred stock refers to an equity investment type carrying a few privileges and preferences for all investors based on the related regulations. It is a class of stock that offers fixed dividend payments, usually at a specified rate, to shareholders before any dividends are distributed to common stockholders. Let us learn more about the important aspects of a cumulative preferred stock below.

How a Cumulative Preferred Stock Operates

Cumulative preferred stock provides shareholders with specific rights and preferences, particularly regarding dividend payments and liquidation. Here's how it generally operates:

  • Dividend Payments: Cumulative preferred stockholders are entitled to receive fixed dividend payments at a specified rate before any dividends can be distributed to common stockholders. The unpaid dividends accumulate and must be paid in the future if a company fails to pay dividends in a particular period. It is before any dividends can be allocated to common stockholders. This cumulative feature ensures that preferred stockholders eventually receive their missed dividend payments.
  • Dividend Priority: Preferred stockholders, including those with cumulative preferred stock, have priority over common stockholders when it comes to dividend distributions. They receive their fixed dividends before any payments are made to common shareholders. This priority enhances the stability of dividend income for preferred stockholders, as they have a higher claim on the company's profits.
  • Liquidation Preference: In the event of liquidation or bankruptcy, cumulative preferred stockholders have a higher claim on the company's assets compared to common stockholders. They are entitled to receive their initial investment back, along with any accumulated unpaid dividends, before any remaining assets are distributed to common shareholders. This liquidation preference helps protect preferred stockholders' investment in case of company insolvency.
  • Voting Rights: While cumulative preferred stockholders generally have limited or no voting rights, their voting power may vary depending on the company's bylaws or preferred stock agreement terms. In most cases, preferred stockholders have voting rights only on matters directly affecting their rights and interests.
  • Convertibility and Redemption: Some cumulative preferred stocks may include provisions allowing conversion into common stock or redemption by the issuing company after a certain period. These features provide flexibility to investors and the issuing company but are dependent on the specific terms outlined in the preferred stock agreement.

Advantages of a Cumulative Preferred Stock

Cumulative preferred stocks offer several advantages to investors. Here are some key benefits associated with investing in cumulative preferred stocks:

  • Receives Dividend Payments: One of the advantages of cumulative preferred stocks is their priority in receiving dividend payments. Preferred stockholders, including those with cumulative preferred stocks, have a higher claim on dividend distributions compared to common stockholders. They are entitled to receive fixed dividends at a specified rate before any dividends are allocated to common shareholders. This feature provides investors with a more predictable income stream and a greater level of stability in terms of receiving regular dividend payments.
  • Offers Potential for Capital Preservation: Cumulative preferred stocks generally offer higher capital preservation than common stocks. Due to their fixed dividend payments and priority in receiving distributions in the event of liquidation, preferred stockholders, including those with cumulative preferred stocks, have a greater level of protection for their investment. This can particularly appeal to investors seeking a more conservative approach or a steady income stream.
  • Has Lower Volatility: Preferred stocks, including cumulative preferred stocks, typically exhibit lower price volatility compared to common stocks. Their stable dividend payments and fixed income characteristics can result in less price fluctuation. It further provides investors with a more stable investment option. This can be a good thing for people wanting a consistent and predictable return on their investments.
  • Offers Higher Yields: Cumulative preferred stocks offer higher dividend yields compared to other fixed-income securities. This can be attractive to income-oriented investors looking for investments that generate higher income levels.
Meet some lawyers on our platform

Zachary J.

387 projects on CC
CC verified
View Profile

Ryenne S.

671 projects on CC
CC verified
View Profile

Michael K.

101 projects on CC
CC verified
View Profile

Danny J.

13 projects on CC
CC verified
View Profile

Disadvantages of a Cumulative Preferred Stock

Cumulative preferred stocks offer many advantages to investors. Yet, everyone must consider the potential disadvantages associated with this investment option.

  • Lower Capital Appreciation Potential: Cumulative preferred stocks tend to have limited potential for capital appreciation compared to common stocks. Their prices are often influenced more by changes in interest rates rather than the company's underlying performance. If the stock's market value increases substantially, the price appreciation for preferred stocks may not be proportional, resulting in missed capital gains opportunities.
  • Interest Rate Sensitivity: Preferred stocks, including cumulative preferred stocks, are generally sensitive to changes in interest rates. The fixed dividend payments offered by preferred stocks may become less attractive when interest rates rise. This can lead to a decline in the market value of all kinds of preferred stocks.
  • Limited Voting Rights: Preferred stockholders, including those with cumulative preferred stocks, typically have limited or no voting rights in the company. This means that investors have less influence over corporate decisions compared to common stockholders. It can be a disadvantage for those seeking a voice in corporate governance despite not being a concern for income-oriented investors.
  • Subordination to Debt Holders: In the event of a company's liquidation or bankruptcy, cumulative preferred stockholders may still have a lower priority compared to debt holders. This means that if there are insufficient assets to cover all liabilities, debt holders will be paid first before preferred stockholders. This subordination can increase the risk of loss for preferred stockholders in challenging financial situations.
  • Potential for Call Risk: Some cumulative preferred stocks may include a call provision allowing the issuing company to redeem the shares before maturity. While this may be favorable for the company, it can result in early redemption and the loss of future dividend income for investors. Investors should carefully consider the call risk associated with the preferred stock before investing.

Key Terms for Cumulative Preferred Stocks

  • Call Provision: A provision that allows the issuing company to redeem or repurchase cumulative preferred stock before the stated maturity date, potentially resulting in early redemption for investors.
  • Capital Appreciation Potential: The limited potential for cumulative preferred stocks to experience increases in market value compared to common stocks due to factors such as interest rate influences.
  • Redemption Price: The price at which the issuing company can repurchase cumulative preferred stock from shareholders, typically at a premium to the original issuance price.
  • Callable Preferred Stock: Cumulative preferred stock that includes a call provision, enabling the issuing company to redeem the shares at a specified price within a certain timeframe.
  • Voting Rights in Special Circumstances: While cumulative preferred stockholders typically have limited voting rights, they may have the ability to vote on matters that directly impact their rights, such as changes to the dividend payment structure or liquidation preferences.

Final Thoughts on Cumulative Preferred Stocks

A cumulative preferred stock offers investors certain advantages, including priority dividend payments, potential capital preservation, and a stable income stream. The cumulative feature ensures that missed dividends accumulate and must be paid in the future, providing additional security for investors. However, it's important to consider the potential disadvantages, such as limited capital appreciation potential and interest rate sensitivity. Understanding the terms and conditions, evaluating the financial stability of the issuing company, and assessing individual investment goals and risk tolerance are important for making informed decisions regarding cumulative preferred stock. With careful consideration and proper due diligence, investors can incorporate cumulative preferred stock into their investment portfolios to potentially benefit from its stable income characteristics and favorable risk-return profile.

If you want free pricing proposals from vetted lawyers that are 60% less than typical law firms, click here to get started. By comparing multiple proposals for free, you can save the time and stress of finding a quality lawyer for your business needs.

ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our Cumulative Preferred Stock Lawyers

Elizabeth W. on ContractsCounsel
View Elizabeth
5.0 (6)
Member Since:
December 11, 2021

Elizabeth W.

Legal Counsel
Free Consultation
Minneapolis, MN
7 Yrs Experience
Licensed in MA, RI
Suffolk University Law School

Liz is an experienced insurance professional, having worked with carriers and brokers for over 10 years. She can review or draft a variety of commercial agreements and is here to help your business. Specialties include: Master Service Agreements, business process outsourcing, marketing and partnership agreements, broker agreements, business associate agreements, and NDAs.

James A. on ContractsCounsel
View James
Member Since:
December 5, 2021

James A.

Attorney at Law
Free Consultation
Birmingham, AL
7 Yrs Experience
Licensed in AL
Birmingham School of Law

James Allen is a native of Birmingham, Alabama. Mr. Allen has a considerable amount of experience in the areas of domestic relations, family law, criminal law, and general civil litigation, both at trial and on appeal in state court.

Emily Y. on ContractsCounsel
View Emily
Member Since:
December 6, 2021

Emily Y.

Free Consultation
Colorado Springs, Colorado
8 Yrs Experience
Licensed in CO
University of Colorado

I am available to advise on entity formation, contracts, and employment policies. I am also comfortable litigating business disputes including partnership disputes and employment cases. Prior to opening my current practice, I worked for several years in a small civil litigation practice focused on employment matters and civil litigation. I attended law school at the University of Colorado, and I went to the University of British Columbia for my undergraduate education.

Philip M. on ContractsCounsel
View Philip
Member Since:
December 13, 2021

Philip M.

Free Consultation
San Diego
6 Yrs Experience
Licensed in CA
Thomas Jefferson School of Law

I have been a freelance attorney for several years and have many of my clients returning to me for continued work because of the quality I produce.

Amy Sue L. on ContractsCounsel
View Amy Sue
Member Since:
January 4, 2022

Amy Sue L.

President, Concierge Legal
Free Consultation
Washington, DC Metropolitan Area
27 Yrs Experience
Licensed in CA, DC, PA, VA
Pepperdine University School of Law

Ms. Leavens is a corporate attorney with 10 years of experience as the General Counsel, Chief Compliance Officer and Corporate Secretary of a Congressionally chartered, non-profit corporation, and more than 20 years of experience as an advisor to executive officers and boards of directors in for-profit and non-profit organizations. She has substantial experience within in-house legal departments managing cross-functional teams comprised of multiple business units and attorneys on large-scale mission critical projects, and within a global law firm as a manager of public and private, domestic and international, multi-party business transactions. She has unique experience implementing government-sponsored business initiatives. Ms. Leavens was honored in 2015 as one of Washington, D.C.’s Top Corporate Counsel by Bisnow and the Association of Corporate Counsel; nominated in 2014 for the Association of Corporate Counsel (WMACCA) Outstanding Chief Legal Officer Award; and the recipient in 2014 of WMACCA’s Community Service Award.

Elizabeth V. on ContractsCounsel
View Elizabeth
Member Since:
January 6, 2022

Elizabeth V.

Corporate Counsel
Free Consultation
Indianapolis, IN
10 Yrs Experience
Licensed in IN
IU McKinney School of Law

Most of my career has been as in-house counsel for technology companies. My responsibilities included managing all vendor/procurement contracts and compliance, customer/partner/reseller contracts and compliance, data security/privacy compliance and incident responses, HR/employment issues, and legal operations. I am very comfortable negotiating Commercial Contracts, Vendor Agreements, and Procurement Contracts for goods, services, and licensing, as well as addressing Employment & Labor, Intellectual Property, and Data Privacy issues and compliance. I specialized and have a certificate in IP in law school and continued to develop in that area as in-house counsel for Interactive Intelligence, Genesys, which are unified communication companies, and KAR Global in the automobile digital services lines of business.

Find the best lawyer for your project

Browse Lawyers Now

Quick, user friendly and one of the better ways I've come across to get ahold of lawyers willing to take new clients.

View Trustpilot Review

How It Works

Post Your Project

Get Free Bids to Compare

Hire Your Lawyer

Business lawyers by top cities
See All Business Lawyers
Cumulative Preferred Stock lawyers by city
See All Cumulative Preferred Stock Lawyers

Contracts Counsel was incredibly helpful and easy to use. I submitted a project for a lawyer's help within a day I had received over 6 proposals from qualified lawyers. I submitted a bid that works best for my business and we went forward with the project.

View Trustpilot Review

I never knew how difficult it was to obtain representation or a lawyer, and ContractsCounsel was EXACTLY the type of service I was hoping for when I was in a pinch. Working with their service was efficient, effective and made me feel in control. Thank you so much and should I ever need attorney services down the road, I'll certainly be a repeat customer.

View Trustpilot Review

I got 5 bids within 24h of posting my project. I choose the person who provided the most detailed and relevant intro letter, highlighting their experience relevant to my project. I am very satisfied with the outcome and quality of the two agreements that were produced, they actually far exceed my expectations.

View Trustpilot Review

How It Works

Post Your Project

Get Free Bids to Compare

Hire Your Lawyer

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call

Find lawyers and attorneys by city