Dividend Drag

finance a la shmoop what is an accumulated dividend okay you know what

a dividend is companies generally commit to paying it when they have so much [Example of dividend meaning on a 100 dollar bill]

extra cash profit that they really don't know what to do with the dough yeah nice

place to be in the case of a preferred stock the dividends aren't just a

optional-ish they operate more like bond interest only with a catch

that is dividends on preferred stock can in fact be halted without the company

being repossessed by the debt holders like in the case where the company falls [Prize wheel lands on hard times]

on hard times or it wants to preserve its cash to buy a competitor or it just

wants another jet with a water slide thing on it well yeah it can halt its [Person slides down a jet slide]

dividend in those cases and well there are two types of preferred stock in this

realm the ones that pay cumulative dividends and the ones that don't

cleverly named non-cumulative say a company has halted dividends from its

preferred for three and a half years and it was paying five bucks a quarter in [Dividend distribution graph]

dividends from those cumulative preferred well if it was to resume

paying dividends on them it would first have to pay all back fourteen quarters

worth of dividends before it began to issue more dividends or pay them to its

preferred holders that is it owed three years times four quarters or twelve

quarters plus half a year or two quarters for a total of fourteen

quarters at five bucks a quarter a share that's five times fourteen or seventy [Formula of non-cumulative dividends]

dollars a share in back cumulative dividends big obligation but it has to

pay that amount before it can resume dividend payments why would a company

have a cumulative feature in its preferred dividend obligation well

because investors forced it to do so or they wouldn't invest they were worried [Person swipes away stacks of money]

that the preferred dividends might be just some merrily stopped and then the

investors would have little or no return on their investment in the preferred and

this can be a problem for companies that have fallen on hard times they are

essentially made illiquid in that they can't afford to pay the back dividends [Example of illiquid meaning]

on the preferreds and they can't raise more capital with this blight on their

record of having stopped paying a divvy well most [Non cumulative stock stickers appear on a table]

furred stocks are non-cumulative and if companies decide to just stop paying

them they can but if they do it's kind of like they've reneged on a handshake [Two guys giving a handshake]

and you know investors talk so like good luck to the company ever trying to raise

capital again from the cold cruel outside world yeah welcome to Wall

Street [Wall Street road sign]