Dividends in Arrears

Dividends in Arrears refers to unpaid dividends on cumulative preferred Stock that have not been paid in the year they were due. When a company has cumulative preferred stock, it is required to pay dividends in full before any dividends can be distributed to common stockholders. If a company fails to pay the dividend in a given year, the unpaid amount accumulates and must be paid out before any future dividends to common shareholders can be issued.

Example: If a company has cumulative preferred shares with a $1 dividend per Share, and it fails to pay dividends for three consecutive years, the dividends in arrears would amount to $3 per share. When the company decides to pay dividends again, it must first pay the $3 in arrears to preferred shareholders before distributing any dividends to common shareholders.

Case: Consider a company, ABC Corp, with 1,000 preferred shares outstanding. The annual dividend is $2 per share. If ABC Corp does not pay dividends for 2 years, the dividends in arrears would total $4,000 (1,000 shares x $4). In the third year, if ABC Corp has sufficient earnings to pay dividends, it must pay the $4,000 in arrears to the preferred shareholders before it can issue any dividends to common shareholders.