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 Shareholder/">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 Shareholder/">Shareholders before distributing any dividends to common Shareholder/">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 Shareholder/">Shareholders before it can issue any dividends to common Shareholder/">Shareholders.