Cumulative preferred stock is a type of stock in which preferred shareholders are given payout priority over regular shareholders in case dividends are put on hold.
Usually, preferred stocks produce a fixed dividend, with quarterly pay outs to preferred stockholders. However, these payments may be temporarily put on hold in times of financial difficulty. In such a situation, funds are directed to more urgent expenses, particularly those which are crucial in the operation of the business.
When the business finally pulls through and gains enough financial strength to resume the pay out of dividends, preferred shareholders should be able to receive their payouts first. Under the conditions of cumulative preferred stocks, all deferred payments must be paid out eventually.
Non-cumulative stocks, which are taken as opposite to cumulative preferred stocks, do not add up, should payouts be suspended temporarily. These may also be referred to as straight stocks and are common in preferred stocks for banks. Most preferred stocks are cumulative, however.