Cumulative Preferred Stock is a preferred stock that entitles the holder to receive unpaid dividends prior to the payment of any dividends to common stockholders. Dividends that accumulate in arrears on cumulative issues are always the first dividends to be paid by a corporation.
Applying "Cumulative Preferred Stock" to Securities Exams:
If a corporation is experiencing financial difficulty the company may not be able to pay the stated dividend on its preferred stock. If the preferred stock is a cumulative preferred stock any dividends that are missed are still owed to the investors. If the preferred stock was not cumulative the investor would not be owed the past dividends.