Cumulative and non-cumulative preferred stock are two distinct variations of preferred stock, each with unique features that impact how dividends are treated.

Cumulative Preferred Stock:
Cumulative preferred stock comes with a guarantee that if the company is unable to pay dividends in a given period, the unpaid dividends accumulate and must be paid out to shareholders before any dividends are distributed to common shareholders. This means that if dividends are skipped or reduced, the company is obligated to make up those missed payments in the future before resuming dividends for common shareholders. Cumulative preferred stockholders have a higher level of assurance that they will eventually receive their dividends, even if there are temporary setbacks.

Non-Cumulative Preferred Stock:
Non-cumulative preferred stock, on the other hand, does not carry the same guarantee. If the company fails to pay dividends in a particular period, the unpaid dividends do not accumulate. Instead, they are forfeited, and the company does not have an obligation to make up those missed payments in the future. Non-cumulative preferred stockholders are more exposed to the risk of not receiving dividends during challenging financial periods.

The primary distinction between cumulative and non-cumulative preferred stock lies in the treatment of missed dividend payments. Cumulative preferred stock ensures that unpaid dividends accumulate and must be paid out eventually, while non-cumulative preferred stock does not require the company to make up missed dividend payments. Investors considering preferred stock investments should carefully assess their risk tolerance and income needs to determine which type of preferred stock aligns better with their financial goals.