What is an Accumulated Dividend?

An accumulated dividend is a dividend on cumulative preferred stock that is due but has not yet been paid. This situation arises because preferred stock frequently requires a dividend to be paid in a specific amount at certain fixed intervals. If a business does not have sufficient cash to pay these dividends, then it has an obligation to pay them before any other dividends can be paid out. Thus, the holders of cumulative preferred stock have a payment preference over the holders of non-cumulative preferred stock and common stock. Investors prefer cumulative preferred stock, since they will earn the right to receive dividends at some point in the future, even if the company does not have the cash flow to make the payments right now.

Example of an Accumulated Dividend

As an example of an accumulated dividend, a company has issued 1,000 shares of cumulative preferred stock with an annual dividend of $5 per share. The firm could not pay dividends for the past two years, due to financial difficulties. This means that the company has an accumulated unpaid dividend of $10,000. Before it can pay any dividends to its common shareholders, it must first pay the accumulated dividend of $10,000 to its preferred shareholders.

Accounting for an Accumulated Dividend

An accumulated dividend is an obligation of the corporation, so it is recorded as a liability on the balance sheet until it is paid. It is classified as a current liability, since it is essentially overdue for payment.