What it means
When a business issues preferred shares with a cumulative feature, it promises to pay a set percentage of the share value as a regular dividend. If the company hits a rough patch and cannot afford to pay, those missed payments do not simply disappear.
Instead, they become dividends in arrears. This backlog matters immensely because companies cannot pay any dividends to everyday common shareholders until all accumulated arrears are fully paid off to the preferred investors.
This creates a queue where preferred owners have priority, protecting their initial investment returns. In practical terms, this backlog sits off the main balance sheet as a note in the financial statements, but it heavily influences company decision-making.
Potential investors check this figure carefully before buying shares, as a large backlog signals past financial trouble and blocks future payouts to common owners. Managers must treat this backlog as a priority financial obligation.
Ignoring it damages credibility with investors and makes raising new capital nearly impossible. Clearing the arrears is usually the first financial milestone a recovering business aims to achieve.
In practice
Real-world examples.
Example
TechStart Ltd missed its 5 percent preferred dividend of 10,000 pounds for two straight years. The company now carries 20,000 pounds in dividends in arrears that must be cleared before founders get any payouts.
Example
Brighton Bakery skipped preferred shareholder payouts during a tough renovation year, accumulating 15,000 pounds in arrears. The owner must pay this total backlog plus the current year before distributing profits.
Example
GreenEnergy PLC deferred its cumulative dividends for three years during a supply chain crisis, building up a 150,000 pound arrear. Institutional investors refused new funding until this backlog was fully cleared.
Think of it
“Imagine a landlord who lets you skip rent for a few months during a hard time. That rent is not forgiven, it simply piles up as arrears, and you must pay it all back before you are allowed to spend money on home renovations.
Formula
Calculation
Total Arrears = (Annual Dividend Rate x Share Value x Number of Preferred Shares) x Number of Skipped Years. For example, if a company has 1,000 preferred shares valued at 100 pounds each, with a 6 percent annual dividend, and has missed 2 years: (0.06 x 100 x 1,000) x 2 = 12,000 pounds in arrears.Case study
Seen in the real world.
Oakwood Retail PLC experienced a severe downturn in 2022, forcing management to suspend all dividend payments to preserve cash. Among their share classes were 5,000 cumulative preferred shares, each carrying a 10 pound par value and a promised 7 percent annual return. Because the dividend was cumulative, the missed payment of 3,500 pounds for 2022 was recorded as dividends in arrears. The following year, 2023, brought another difficult trading period, and the company again could not pay, adding another 3,500 pounds to the backlog. By the end of 2023, Oakwood carried 7,000 pounds in total dividends in arrears. In 2024, the business finally turned a corner and generated a healthy profit. Before management could reward ordinary shareholders or reinvest surplus cash into a new store, they were legally required to settle the 7,000 pound backlog, plus the current year preference dividend of 3,500 pounds. Once the total 10,500 pounds was distributed to the preferred stockholders, Oakwood cleared its slate and restored regular financial health.
Watch out
Common mistakes.
- Treating unpaid dividends on ordinary shares as arrears, when arrears only apply to cumulative preferred shares.
- Failing to disclose the backlog in the financial statement notes, which misleads potential investors.
- Paying dividends to common shareholders while cumulative preferred shareholders are still owed past payments.
Questions
People also ask.
Do all preferred shares create dividends in arrears when skipped?
No, only cumulative preferred shares accumulate missed payments. Non-cumulative preferred shares simply lose the missed payment forever if it is skipped.
Are dividends in arrears listed as a liability on the balance sheet?
No, they are typically disclosed in the notes to the financial statements rather than as a formal liability until the board formally declares the dividend.
Can a company buy back its own shares while it has dividends in arrears?
Usually no. Most corporate governance rules and share agreements restrict share buybacks until all preferred dividend arrears are fully settled.
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