Definition§
A passed dividend refers to a dividend that is normally paid on common shares but is not declared by the company’s board of directors, often due to financial difficulties. This term is synonymous with an omitted dividend. In the context of cumulative preferred stock, it refers to dividends that are skipped; these skipped payments accumulate and must be paid out before any dividends can be given to common shareholders.
Examples§
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Common Shares:
- Company A typically pays a quarterly dividend to its common shareholders. However, due to a recent downturn in business performance, the board decides not to declare a dividend for this quarter, resulting in a passed or omitted dividend.
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Cumulative Preferred Shares:
- Company B issues cumulative preferred stock that guarantees an annual dividend of $5 per share. Due to financial woes, the company decides not to pay this dividend this year. The unpaid $5 per share is not forgotten but rather accrues and must be paid before any future dividends are issued to common shareholders.
Frequently Asked Questions§
What happens to passed dividends on common shares?§
If a dividend on common shares is passed, affected shareholders miss out on that dividend payment, and the company does not owe this missed dividend in future periods.
Are passed dividends on cumulative preferred stock lost?§
No, passed dividends on cumulative preferred stock are not lost. They accumulate and must be paid out before any dividends can be distributed to common shareholders in the future.
Why might a company fail to declare a dividend?§
There are several reasons a company might fail to declare a dividend, including financial difficulties, the need to conserve cash for other operational needs, or the need to reinvest funds back into the business.
Can passed dividends affect a company’s stock price?§
Yes, failing to declare expected dividends can negatively impact a company’s stock price as shareholders may perceive this as a sign of financial instability or declining profitability.
Is there a legal obligation to pay accumulated dividends on cumulative preferred stock?§
Yes, there is a legal obligation to pay any accumulated dividends on cumulative preferred stock before any dividends can be paid to common shareholders.
Related Terms§
Omitted Dividend§
A dividend that a company typically declares and pays but fails to do so, usually due to financial constraints.
Cumulative Preferred Stock§
A type of preferred stock that entitles shareholders to dividends which, if not paid, accumulate and must be paid out before common shareholders receive any dividends.
Common Shares§
Shares that represent ownership in a company, typically entitling shareholders to vote at shareholders’ meetings and to receive dividends.
Financial Distress§
A situation when a company is struggling to meet its financial obligations, often leading to measures such as cutting dividends to conserve cash.
Online References§
Suggested Books for Further Studies§
- “The Intelligent Investor” by Benjamin Graham
- “Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports” by Howard Schilit
- “Common Stocks and Uncommon Profits and Other Writings” by Philip Fisher
Fundamentals of Passed Dividend: Corporate Finance Basics Quiz§
Thank you for exploring the concept of passed dividends in corporate finance and for engaging with our quiz to bolster your understanding of this crucial topic!
