Dividends in Arrears

What are Dividends in Arrears?

Dividend in arrears is nothing but the cumulative amount of dividend, unpaid on an expected date to a cumulative preferred stockholder. It can happen due to reasons like the company may not have sufficient cash balance to make the payment of dividends.

Important Terms

For understanding the dividend in arrears, we need to know about the below terms first:

Features of Dividend in Arrears

Some of the features are as below:

Example of Dividends in Arrears

Let’s understand this with the below example of dividends in arrears in cumulative preferred stockCumulative Preferred StockCumulative preferred stock is a class of shares wherein any current year's unpaid or undeclared dividends must be accumulated and paid in the future. However, such stocks are costlier, do not have voting rights and cannot demand the interim dividends.read more

You can download this Dividends in Arrears Excel Template here – Dividends in Arrears Excel Template

ABC Inc issued 10,000 ordinary shares and 1000 cumulative preference shares. A cumulative preferred shareholder will receive a guaranteed $ 5 per share each year as a dividend. These shares are issued on 1st Jan’2015. As on 31st Dec’15 Company does not have sufficient cash balance for making the payment to its preference shareholder. Therefore the total dividend amount on cumulative preference shares remains unpaid and will treat as a dividend in arrears.

Solution:

Calculation of dividend in arrears on 31st Dec’18 will be –

Example 1
  • Dividend in Arrears as on 31st Dec’18 = Total No. of Cumulative Preference Shares Issued * Dividend
  • Dividend in Arrears as On 31st Dec’18 = 1000 * $ 5 = $ 5000
  • Second and third-year also, ABC Inc is not able to make the payment of dividends because of the unavailability of cash balance; therefore total unpaid dividend as on 31st Dec’17 will be $ 15000.
  • Now on the fourth-year company has does good business and company have sufficient cash balance to make the dividend as follows:

Case #1

  • ABC Inc will pay a total dividend of $ 40000 to its shareholders in below manner:
  • The dividend will be first payable to cumulative preference shareholders with the arrears of dividends.

Calculation of Total Dividend in Arrear will be –

Dividends in Arrears Example 1.1
  • Total Dividend in Arrear = No. of Shares * Dividend per Shares* No. of Year
  • Total Dividend in Arrear = 1000 * $5 * 4 = $ 20000
  • After making payment to a cumulative preference shareholder balance of $ 20,000 will pay to a common shareholder, which is $ 2 per share.

Case #2

  • ABC Inc will pay a total dividend of $ 20000 to its shareholders in below manner:
  • The dividend will be first payable to cumulative preference shareholders with the arrears of dividends.
  • Total Dividend in Arrear = 1000 * $5 * 4 = $ 20000
  • Now there is nothing in balance; therefore, common shareholders will not get any dividend.

Case #3

  • ABC Inc will pay a total dividend of $ 10000 to its shareholders in below manner:
  • The dividend will be first payable to cumulative preference shareholders with the arrears of dividends.
  • Total Dividend in Arrear = 1000 * $5 *4 = $ 20000
Arrear YearsAmount
2015$5,000
2016$5,000
2017$5,000
2018$5,000
  • ABC Inc will pay only $ 10,000. Therefore, it pays the first arrears of the year 2015 and 2016, and 2017 and 2018 will remain as it is.
  • Since there is no balance left; therefore, ordinary shareholders will not receive any dividend.

Conclusion

Dividends in arrears is a cumulative amount of unpaid dividends of past years payable on cumulative preference shares only. Cumulative preference share helps the company to raise funds, and it is a very attractive financial instrument because it is carrying the nature of equity and debt both.

It is beneficial for the investors because they will get a fixed rate of dividend and preference over ordinary shareholders. Still, sometimes it will be delayed if the company does not have a sufficient amount of cash, and they will also not get any interest in delay payment of dividends.

At the same time, it is beneficial for the company that the company needs not require to compulsorily require to pay every year. It can be paid in the latter year also with the arrear of the past year without any interest.

This article has been a guide to what are dividends in arrears. Here we discuss the top features and examples of dividends in arrear in cumulative preferred stocks. You can more about finance from the following articles –

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