A strong incentive to a corporation to meet preferred stock dividend payments is provided by the ___________ feature of some preferred stocks.

Question

Quizplus · Accepted Answer

An important feature of preferred stock is that the dividend payments are usually cumulative in nature. This provides a strong incentive for the corporation to meet preferred stock dividend obligations on an annual basis, even though preferred stock does not have a fixed, contractual obligation as do bonds. If the corporation gets behind in preferred stock dividends, it may create a situation that is difficult to get out of in the future. Being behind or in arrears on preferred stock dividends can make it almost impossible to sell new common stock because of the preclusion of common stock dividends until the preferred stockholders are satisfied.

A Strong Incentive to a Corporation to Meet Preferred Stock