Cumulative preferred stock is an equity instrument that pays a fixed dividend on a predetermined schedule, and prior to any distributions to the holders of a company's common stock. The amount of the dividend is usually based on the par value of the stock. Thus, a 5% dividend on preferred shares that have a $100 par value equates to a $5 dividend.
This dividend payment is cumulative, so any delayed prior payments must also be paid before dividend distributions can be made to the holders of a company's common stock. This situation typically arises when a company has cash flow difficulties, and so its board of directors elects to temporarily suspend dividend payments until such time as cash flows improve.
As long as a company has not paid scheduled dividends, the amount of the unpaid dividends is said to be in arrears, and is disclosed in the notes accompanying its financial statements.
In the event of liquidation, the holders of preferred stock must be paid off before common stock holders, but after secured debt holders have been paid. Preferred stock holders can have a broad range of voting rights, ranging from none to having control over the eventual disposition of the entity.
Preferred stock is also known as preference shares or cumulative preferred shares. The European term for cumulative preferred stock is cumulative preference shares.