An accumulated dividend refers to payments that are due to stockholders that have not yet been paid. The company must record it as a liability on accounting records, indicating that there is an obligation to pay. Legally, companies are allowed to defer dividend payments until they are able to make them, and to keep adding accumulated dividends until a payout can occur. Shareholders should maintain careful records if they are owned monies on their investments, to make sure they receive appropriate payments when the company does issue the accumulated dividend.
This most commonly occurs with preferred stock, a type of share that comes in several forms. It acts like a mixed investment because while it is a share like a stock, it is also a form of debt instrument. People who hold preferred stock have no voting rights, but are entitled to dividends before common stockholders. In the event the company liquidates, they are also first in line above people carrying common stock as an investment. Some types allow people to convert their preferred shares to common stock if they want to change their investment position.
Companies can choose to allow an accumulated dividend to build up on preferred stock if they cannot make the payment or it would not be advantageous. The structure of the stock agreement and legal standards allow them to do so without penalty and with low risk. Importantly, the accumulated dividend doesn’t threaten their credit rating, which would happen if the company didn’t meet debt obligations. This can be significant for companies that may be attempting to balance bad assets or limited liquidity.
For financial recordkeeping purposes, the company must disclose accumulated dividend balances as an liability. This serves as an alert to shareholders and other interested parties about an upcoming expense, as commonly the company plans to make the payment in the next accounting period. A very high balance of liabilities can indicate that a company is in financial trouble. It could be attempting to prevent bankruptcy or preparing for closure, both of which would have a significant impact on investors.
Shareholders should keep duplicate copies of the records pertaining to stocks they hold as investments. These records discuss the type of share and number held, and provide information about where to go if stocks are lost or stolen. Documentation like dividend announcements, annual reports, and related materials should also be retained because it may be important in the future. Earnings from dividends also need to be reported for tax purposes.