Final answer:
Cumulative preferred stockholders have the right to receive a fixed dividend payment before any dividends are distributed to common stockholders.
Step-by-step explanation:
Cumulative preferred stockholders have the right to receive a fixed dividend payment before any dividends are distributed to common stockholders. This means that if a company has accumulated unpaid dividends in the past, preferred stockholders must be paid their arrears before any dividends can be paid to common stockholders.
For example, let's say a company issues cumulative preferred stock with a fixed dividend of $2 per share. If the company fails to pay the dividend for a particular year, the unpaid dividends accumulate and become arrears. When the company decides to pay dividends again, it must first pay the accumulated unpaid dividends to preferred stockholders before distributing any dividends to common stockholders.
Overall, cumulative preferred stock provides a certain level of income security to stockholders compared to common stockholders, who are not guaranteed dividends.