Shares can have special rights, or other attributes that the ‘regular’ shares (common shares) do not have. If so, these shares are preferred shares. Here I will only consider preferred shares that receive dividend before the common shareholders do.
Preferred (dividend) shares legally qualify as equity, but economically have more common with a loan. Preferred shareholders receive a fixed dividend if earnings permits. The amount of net income in excess of preferred dividend can be used to pay a dividend to the common shareholders.
The preferred dividend can be either non-cumulative, or cumulative. In case the shares are non-cumulative, the claim on the dividend is not carried forward to the next year to the extent that earnings fall short to pay out the preferred dividend. When the shares are cumulative preferred shares, any unpaid dividend is carried forward to the next period. The carried forward dividends are called ‘dividend in arrears’.
Dividend Preferred Shares Explained
– holders of preferred (dividend) shares have priority over common shareholders to receive a dividend
– if there is no profit, then also the preferred shareholders receive no dividend
– the preference can be cumulative, in which case unpaid dividend (‘in arrears’) is carried forward, or noncumulative