a dividend due for payment date, but a company has yet to pay the shareholder. An accumulated dividend is also known as a dividend in arrears.
How Accumulated Dividend Works
An accumulated dividend is any dividend that is due for payment, but an issuer hasn't paid to shareholders. The company or issuer holds the dividend to gather a compound dividend. Therefore, it's safe to say that an accumulated dividend is a dividend on preferred stock that hasn't been paid and is carried forward from the last trading period.
Preferred stock can either be "cumulative" when it comes to dividends or "non-cumulative," which is usually the case. Non-cumulative shares are only entitled to dividends when dividends are declared. However, some investors may prefer a guaranteed dividend on preferred stock. With a cumulative preferred stock, an investor earns dividends whether the companies can pay them immediately or not.
When some companies are not financially capable of paying a dividend during a particular year, they form accumulated dividends. These dividends are considered a priority and paid to shareholders first before other dividends. Accumulated dividends become an obligation for the company; thus, their sum is listed in the company's balance sheet as a liability until eventually paid.
Example of Accumulated Dividend
For instance, you are one of the XYZ firm owners, and your business has issued several preferred shares of $3 per share, whose cumulative dividend your company pays out quarterly. The XYZ firm also has some outstanding common stock that holders have received a $1 per share dividend for the last quarter.
There's also an ongoing recession, and your company's board has decided to suspended dividend payments due to the impact of the recession on cash flow. In such a situation, the $3 preferred shares would record accumulated dividends over time for as long as they are due and unpaid.
Furthermore, when your firm is finally buoyant enough to pay out dividends to shareholders, it must first pay preferred shareholders. It means the preferred shareholders are the most important in the payment plan, and they get all their accumulated dividends before other shareholders receive payment. The most important note here is that your company must pay accumulated dividends in full because they will continue to accumulate if not paid fully.
Significance of Accumulated Dividend
In this situation, cumulative preferred shareholders have the upper hand over the other stockholders. The reason for the payment preference is because there is a guaranteed dividend attached to preferred shares.
There are various ways a company may choose to address the payment of accumulated dividends. For example, at the time of vesting, a company might input the amount of an investor's accumulated dividend into its payroll system, with the dividend income added in their W-2 for the year.
There may also be taxes to be deducted from the dividend amount. Thus, actual dividend payments issued, excluding taxes, would show up in a paycheck after the shareholders restricted stock awards. After the restricted stock awards vest, the disbursement of that payment is often "as soon as possible."