A Passed Dividend, also known as an Omitted Dividend, refers to a dividend that is typically paid on common shares but which the board of directors decides not to declare. This usually happens due to financial difficulties faced by a company. The phenomenon can also occur with cumulative preferred stock, where the missed dividends accrue and are expected to be paid out in the future once the company’s financial situation improves.
Financial Implications
Impact on Common Shares
When a company decides to pass on dividends for common shares, it often signals financial distress. Shareholders depend on dividends as a source of income, and a passed dividend can lead to a decline in investor confidence and potentially lower stock prices.
Cumulative Preferred Stock
For cumulative preferred stock, a passed dividend does not vanish but instead accumulates. The accumulated dividends must be paid out before any dividends can be paid to common shareholders. This provides a certain level of protection to preferred shareholders.
Example
1Consider a company with cumulative preferred stocks promising an annual dividend of $5 per share. If the company fails to pay the dividend in 2023, shareholders are entitled to this $5 in addition to any future dividends before common shareholders receive anything.
Types of Dividends
- Common Shares Dividend: Typically dependent on company performance, declared and paid regularly.
- Preferred Shares Dividend: These often have fixed rates and are prioritized over common shares but vary in terms of cumulative or non-cumulative nature.
Special Considerations
- Financial Health: A passed dividend is a strong indicator of a company’s financial health and impacts investor sentiment.
- Dividend Policies: The board of directors’ policies on dividends can significantly influence shareholders’ returns and expectations.
Historical Context
Dividends have been a crucial part of investor returns since the inception of stock markets. The decision to pass a dividend, although necessary in times of financial strain, has been historically perceived as a negative indicator of a company’s financial status.
Applicability and Comparisons
Applicability
Passed dividends are particularly relevant to long-term investors focused on income generation through dividends. The ramifications are different for those holding common shares versus cumulative preferred stocks.
Comparisons
- Omitted Dividend (synonym): Used interchangeably with passed dividend, emphasizing the act of not declaring a regular dividend.
- Non-Cumulative Preferred Stock: In contrast to cumulative, any missed dividends are not owed in the future.
Related Terms
- Dividend Yield: The dividend income per share, divided by the price per share.
- Dividend Reinvestment Plan (DRIP): Programs that automatically reinvest dividends back into additional shares.
- Ex-Dividend Date: The cutoff date to be eligible for the declared dividend.
- Dividend Payout Ratio: The proportion of earnings paid out as dividends to shareholders.
FAQs
What should investors do if a company passes a dividend?
Are passed dividends common?
How does a passed dividend affect stock prices?
References
- “Dividends: A Captivating History”, Financial Times, 2023.
- “Understanding Dividends: A Comprehensive Guide”, Investopedia, 2022.
- “Corporate Finance: Theory and Practice”, by Aswath Damodaran, 2011.
Summary
A passed dividend is a critical concept in finance, signaling financial distress and affecting investor confidence. Its implications differ based on whether the shares are common or cumulative preferred, with the latter having protective measures for shareholders. Understanding passed dividends helps investors make informed decisions, especially in evaluating the financial health and future prospects of their investments.
