Home/Blogs/What Are Non-Cumulative Shares

What Are Non-Cumulative Shares

stock market
Published Date: 26 Sep 2023Updated Date: 12 Jun 20246 mins readBy MOFSL
What Are Non-Cumulative Shares

Preference shares are an increasingly popular investment option among those looking for stability and the potential for dividend income in finance. Of all types of preference shares available, non-cumulative preference shares stand out for their unique qualities.

This post will explain non-cumulative preference shares and what makes them popular. 

Open Your free Demat Account in just 5 minutes!

What Are Non-Cumulative Preference Shares?

Corporations issue non-cumulative preference shares as a form of capital raising. Unlike cumulative preference shares, which allow unpaid dividends to accrue and be distributed before common shareholders receive any payout, non-cumulative preference shares do not allow dividends to accumulate.

Hence, if an organization misses payments on non-cumulative preference shares in the future, shareholders do not have any claim over them.

How Do Non-Cumulative Preference Shares Operate?

Non-cumulative preference shares operate similarly to other forms of preference shares, but with several key distinctions:

1. Dividend Priority

Non-cumulative preference shareholders have an exclusive claim on dividends regarding non-cumulative preference shares and common shareholders. When companies declare dividends, non-cumulative preference shareholders receive their fixed dividend amount before other dividends are distributed to common shareholders.

2. No Dividend Accumulation

Non-cumulative preference shares are distinguished from cumulative preference shares by their lack of dividends accumulation, meaning if a company fails to pay out on these dividends when due, shareholders do not have any legal basis to claim those unpaid dividends in future periods; each period's dividends standalone without "carryover".

Advantages of Non-Cumulative Preference Shares 

Now that we understand what non-cumulative preference shares are, let's quickly go over some of their advantages for investors:

1. Higher Dividend Rate

Non-cumulative preference share investors enjoy a significantly higher dividend rate than equity shareholders and other categories of preference shares.

2. Priority On Payment

Non-cumulative preference shareholders will always take precedence over equity shares when it comes to the payment of dividends and claims during the liquidation proceedings of an issuing company.

Disadvantages of Non-Cumulative Preference Shares

1. Risk for Shareholders

Non-cumulative preference shareholders face more risk than those holding cumulative preference shares. Hence, if their dividend is missed, they cannot claim it in the future. Hence, this makes these shares less appealing to risk-averse investors.

2. Lower Dividend Stability

Investors looking for consistent dividend income may find non-cumulative preference shares less appealing. It is because of their inability to accumulate dividends. Therefore, it leads to unpredictable dividend payments.

Conclusion

Non-cumulative preference shares provide both investors and companies with advantages and disadvantages. They give companies greater financial flexibility while appealing to shareholders seeking higher dividend priority. 

However, non-cumulative preference shares increase risk and may not suit those prioritising dividends stability. Understanding non-cumulative preference shares is vital for making informed financial decisions.

 

Trending Blogs: NSE Holidays 2024 | BSE Holidays 2024 | Invest in Small Cap & Mid Cap Mutual Fund & Stocks | Companies affected by Rise in Crude Oil Price | Fall in IT Stocks | Launch of 4 New Indices | Revised Lot Size of Nifty Contracts | Impact of RBI Circular on Currency Trading | RBI’s New Lending Guidelines | Electric Air Taxis in India

 

Financial Calculators: SIP Calculator | SWP Calculator | Compound Interest Calculator | EMI Calculator | FD Calculator | Retirement Calculator | Option Value Calculator | Inflation Calculator | Lumpsum Calculator

You may also like…

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C
Click here to see your activities