Noncumulative and cumulative preferred stocks differ primarily in how they handle missed dividend payments. Cumulative preferred stock entitles shareholders to receive dividends that accumulate if a company skips or defers payments. This means that if a company misses dividend payments due to financial constraints, it is obligated to pay those dividends in arrears before any dividends can be issued to common stockholders. This feature provides added security for investors, ensuring they receive their expected return even if payments are delayed.

In contrast, noncumulative preferred stock does not carry this right. If a company misses a dividend payment on noncumulative preferred stock, shareholders have no claim to those unpaid dividends in the future. Each dividend period stands alone, with no accumulation of unpaid dividends. This characteristic typically makes noncumulative preferred stock a riskier investment relative to cumulative preferred stock, as investors may not receive regular returns during times of financial strain for the issuing company.

For companies, issuing noncumulative preferred stock offers greater flexibility, as they are not obligated to repay missed dividends. However, this reduced security can make noncumulative preferred stock less attractive to risk averse investors who prefer reliable income.

Cumulative preferred stock and noncumulative preferred stock offer different levels of protection when dividends are not paid. Under cumulative preferred stock, a missed dividend normally becomes an accumulated obligation. Even if the company temporarily suspends payments, the unpaid dividends remain due and generally must be paid before common shareholders receive dividends. Noncumulative preferred stock does not work this way. When a company skips a dividend, the shareholder usually loses the right to that particular payment, and the amount does not accumulate for future payment. Therefore, cumulative preferred shares can offer more dependable dividend protection, while noncumulative shares expose investors to greater risk of losing expected income during difficult financial periods. From the company's perspective, noncumulative preferred stock can provide more flexibility because skipped dividends do not normally create a growing obligation. Both types can rank ahead of common stock for dividend payments, but their treatment of missed dividends is significantly different. Investors should consider this feature when comparing preferred stock investments.