Noncumulative Preferred Stock: Definition, How It Works, Types, and Examples

What is noncumulative preferred stock?

Noncumulative preferred stock is a class of preferred shares that does not entitle holders to receive unpaid or omitted dividends in the future. Preferred shares typically carry a stated dividend (a dollar amount or percentage of par value). If a company skips a dividend payment on noncumulative preferred stock, those dividends are forfeited by the shareholders and cannot be recovered later.

How it works

• A company issues preferred shares with a fixed dividend rate.
• If the company declares and pays dividends, preferred shareholders receive their stated amount before common shareholders.
• If the company omits a dividend payment, noncumulative preferred shareholders have no legal claim to the missed payment at any later date.

Noncumulative vs. cumulative preferred stock

• Cumulative preferred: Missed dividends accrue as “dividends in arrears” and must be paid to cumulative holders before any dividends are paid to common shareholders.
• Noncumulative preferred: Missed dividends do not accrue; shareholders lose the right to those payments permanently.
• Because cumulative preferred provides greater protection, it is generally more attractive to investors and therefore more valuable than noncumulative preferred.

Comparison with common stock

• Priority: Preferred shareholders (both cumulative and noncumulative) have priority over common shareholders for dividend distributions and in liquidation.
• Voting rights: Common shareholders typically have voting rights; preferred shareholders usually do not.
• Growth participation: Common shareholders benefit more from company growth; preferred shares behave more like fixed-income instruments.

Convertible bonds and preferred stock (brief note)

Some corporate bonds are convertible into stock (common or preferred). The conversion decision depends on relative market values:
Example: A $1,000 bond convertible into 20 preferred shares.
* If bond market value = $1,050 and preferred share price = $60, conversion value = 20 × $60 = $1,200.
* If an investor seeks income, they may hold the bond; if they want equity upside, they may convert to stock.

Example of noncumulative vs cumulative in practice

If ABC Company skips a $1.10 annual dividend:
* Cumulative preferred shareholders: The $1.10 becomes arrears and must be paid later before common shareholders receive dividends.
* Noncumulative preferred shareholders: The $1.10 is forfeited and will never be paid.

Pros and cons

Pros for issuers:
* Greater flexibility to conserve cash by omitting dividend payments without creating future obligations.

Cons for issuers:
* Must offer more attractive terms (higher yields or discounts) to persuade investors to buy noncumulative shares.

Pros for investors:
* May receive higher stated yields or buy at a discount compared with cumulative preferred shares.

Cons for investors:
* No claim on missed dividends — higher income uncertainty and more downside risk if the company cuts payouts.

Investor considerations

When evaluating noncumulative preferred stock:
* Compare yields and prices against cumulative preferred and other fixed-income options.
* Assess the issuer’s financial stability and dividend track record.
* Consider whether conversion features, call provisions, or liquidation preferences affect total return.
* Factor tax treatment of dividends in your jurisdiction.

Key takeaways

• Noncumulative preferred stock does not entitle holders to recover missed dividends.
• Cumulative preferred stock is more protective for investors because missed dividends accrue.
• Issuers favor noncumulative shares for cash-flow flexibility; investors typically demand higher returns or discounts to compensate for the added risk.