What feature do cumulative preferred stocks provide to investors?

What feature do cumulative preferred stocks provide to investors?

• A. Guarantee steady dividends without delay
• B. Ability to convert to common stock
• C. Receipt of dividends in arrears
• D. No voting rights in corporate affairs

Answer: (C)

Cumulative preferred stocks are designed specifically to ensure that if a company skips a dividend payment, those owed dividends accumulate and must be paid out to cumulative preferred shareholders before any dividends can be paid to common shareholders. This feature provides a safety net for investors, as it guarantees that they will eventually receive the full amount of dividends they are owed, even if there are periods of financial difficulty for the issuing company. Investors in cumulative preferred stocks are reassured that any unpaid dividends will not be lost but will be accrued and paid later, effectively prioritizing their return compared to those who hold common stock. This distinguishes cumulative preferred stock from other types that may not offer such guarantees, which is why the receipt of dividends in arrears is a defining characteristic of this investment vehicle.

Cumulative preferred stocks are designed specifically to ensure that if a company skips a dividend payment, those owed dividends accumulate and must be paid out to cumulative preferred shareholders before any dividends can be paid to common shareholders. This feature provides a safety net for investors, as it guarantees that they will eventually receive the full amount of dividends they are owed, even if there are periods of financial difficulty for the issuing company.

Investors in cumulative preferred stocks are reassured that any unpaid dividends will not be lost but will be accrued and paid later, effectively prioritizing their return compared to those who hold common stock. This distinguishes cumulative preferred stock from other types that may not offer such guarantees, which is why the receipt of dividends in arrears is a defining characteristic of this investment vehicle.