Canadian companies offer a number of preferred stock types. Cumulative Preferred Stocks is just one of those types; think of them as preferred stocks with an additional feature. The “Cumulative” feature comes into play when a company, for whatever reason, stops paying the dividend and at a later time it resumes paying.
Pros and Cons of Cumulative Preferred Stocks
For cumulative preferreds, once the company resumes the dividend you will receive all the missed dividends. In other words, the missed dividend is not gone, it accumulates, and at the time of dividend resumption the holder will receive that amount in addition to the current dividend. The company cannot pay other classes of preferred stock shareholders and common share dividends before all missed dividends on the cumulative preferreds have been paid out. The yield on Cumulative is a bit less due to the additional feature.
In contrast, Non-Cumulative preferreds allow the issuing company to skip dividends and cancel the company’s obligation to pay a dividend on this issue. As a holder of this issue you have no claim to any of the missed dividends. In other words, you will never receive the missed dividends. Once the company resumes paying dividends, owners of Non-Cumulative shares will receive the current and future dividends as planned. Yields on this type are usually a bit higher than on the Cumulative preferreds.
For companies, bonds are counted as a liability but all preferred stocks are considered to be an asset on the company’s balance sheet. For that reason, companies choose to issue preferred stock instead of bonds.
Cumulative Preferred Stocks considerations
Choosing between Cumulative and Non-Cumulative preferreds depends on the type of investor you are. Consider the following factors when making your decision:
- . Yields of preferreds.
- . What will you do if the company stops the dividend? You should have a plan before this happens.
- . Long and short-term goals for this preferred.
Canadian Preferred Shares – Mission
Our mission is to provide the average investor with the knowledge, up to date information, latest trends, data and tools to select the best preferreds to purchase or sell today.
Without tools like the ones we provide here, its simply not possible to make an educated decision, thus keeping most individual investors away. Our tools provide an overall view, of the preferreds market. With a few clicks you can easily locate today’s best preferreds within a sector/category or across the whole market.
Using our homepage as a starting point you can access all of our tools.