Passed Dividend: Understanding Missed Dividend Payments

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.

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.

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.

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.

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.

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