A publicly traded company's preferred stockholders have priority in receiving dividends over common stockholders. If a company’s preferred stock is cumulative and the company misses a dividend payment, it must pay the amount of the missed payment to cumulative preferred stockholders before paying any other dividends. The amount of missed dividend payments is called dividends in arrears, which accumulates until the company pays them. The company is not obligated to pay dividends in arrears until it declares a new dividend. You can calculate the cumulative dividends in arrears using a company’s annual reports.
1. Find a company’s balance sheet in its 10-K annual report. You can obtain this report online from the investor relations section of a company’s website, or from the U.S. Securities and Exchange Commission’s EDGAR database.
2. Find in the “Stockholders’ Equity” section (also know as shareholders' equity) of the balance sheet the number of outstanding cumulative preferred shares, the par value per share and the dividend rate per share, which is the percentage of par value the stock pays as an annual dividend. For example, assume the company has 100,000 cumulative preferred shares outstanding with a $50 par value per share and a dividend rate of 10 percent.
3. Multiply the par value per share by the dividend rate to calculate the annual dividend per share. In this example, multiply $50 by 10 percent, or 0.1, to get a $5 annual dividend per share.
4. Determine from the company’s past annual reports the number of years for which the company missed its dividend payments. In the example, assume the company missed two years of dividend payments.
5. Multiply the number years of missed dividend payments by the annual dividend per share to calculate the dividends in arrears per share. In the example, multiply $5 by two years to get $10 per share of dividends in arrears.
6. Multiply the dividends in arrears per share by the cumulative preferred shares outstanding to calculate the total dividends in arrears. Continuing the example, multiply $10 by 100,000 to get $1 million in total dividends in arrears. This means the company must pay $1 million to cumulative preferred stockholders when it declares a new dividend before paying any dividends to common stockholders and before paying a new dividend to cumulative preferred stockholders.
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