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My understanding is that when a company is not able to issue dividends to the shareholders, the company issues a dividend right certificate and in the future when the company can pay dividends, before dividends are paid on the specific date, all the owners of the dividend rights will get paid all the cumulated "dividends" in the dividend right certificate.

Is this correct or maybe are there other reasons for issuing dividend rights?

Are there many examples like this?And do you know any of them?

Thanks

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  • What's the context? I've seen that term used to describe the "ex-Dividend" period, bot not issued when companies can't pay dividends.
    – D Stanley
    Commented Feb 26, 2018 at 14:35

1 Answer 1

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In reality, shares can have many different qualities, but there are two main 'types' of shares: Common Shares & Preferred Shares. What you are talking about is a quality of some preferred shares.

Preferred shares are typically the only dividends which have a stated 'right' to dividends (common shares receive dividends, basically, at the whim of the board of directors - but common shareholders own the full residual value of the company, whereas preferred shareholders typically will own a directly stated value only). Some preferred shares have a right to 'cumulative' dividends, meaning for example that if your share says you have the right to $1 in cumulative dividends per year, then even if they can't pay you today, or next year, then in 3 years they will owe you a cumulative $3 per share.

Preferred shares typically must be paid before any dividends can be paid to common shareholders - that is why they are called 'preferred': because they have preferential dividend treatment. So before any dividends can be paid to a common shareholder, all of the dividends owed to a preferred shareholder must be paid.

Now if you own 'non-cumulative' preferred shares, then you only have a right to your stated dividend amount if any dividends are declared in the year. So if you own 500 preferred shares with non-cumulative rights of $1 each, then you will receive $500, as long as the company pays dividends in the year. To put a finer detail on it - assume there are 100,000 such shares in existence. If the company pays only $75,000 in dividends in a year, then each of those preferred shares would get $.75 each, rather than the full $1 they are technically owed.

Note that this is different than the concept of a 'dividend right certificate'.

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