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Accrued Dividend Defined
Accrued dividends refer to dividends that the company usually pays to stockholders, but the board of directors has not officially announced the payment. It simply means undistributed preferred stock dividends. Sometimes, the company does not have enough profit to pay dividends on preferred stocks with a fixed dividend rate; sometimes the company has sufficient profit, but for other reasons such as the expansion of the plant, updating equipment, etc., it is decided not to distribute dividends. All these unpaid dividends will naturally accumulate until the company is able to pay. Accrued dividends must be a common stock dividend paid in full before.
A Little More on What is an Accrued Dividend
The accrued dividend is a type of dividend that is declared and due to being paid to the shareholders of the company, but it is still showing as unpaid on the books. This type of dividend is generally applied in context to the holders of cumulative preference shares.
The accrued dividend, in other words, is a form of a dividend that has been declared in a cumulative collection preference; but for some reason, this dividend has not yet been released to the owner of this stock. These collective gains are not the result of the dividends that have continued to be carried forward from previous years against which the shareholders of these cumulative preferred shares can exercise a right that is legally theirs; that is, that the dividend to know them first, above any other type of shareholders, creditors, etc.
Preferred shares can be of two types. The first case is where they can be cumulative in nature where dividends are concerned. And the second type is non-cumulative shares that receive dividends only at the time the company officially announces dividends. There are also some investors who specifically seek a definite gain on the investments made in preferred shares.
A cumulative preferred stock allows the shareholder to receive dividends regardless of the company’s ability to pay the same immediately or at some time on a pre-decided date in the near future. There are adverse market conditions and financial situations, when companies or trading houses are not in an excellent financial situation and, as a result, are unable to distribute a dividend during a year as financial. In such circumstances, this category of accrued dividends is created. Once they are created, it becomes mandatory that these dividends be paid ahead of any other dividends at the first opportunity when funding is available.