What kind of dividends do cumulative preference shares guarantee?

Cumulative preference shares guarantee both current and back dividends. This means that if a company is unable to pay dividends in any given year, the unpaid dividends accumulate and must be paid in the future before any dividends can be distributed to ordinary shareholders.

For cumulative preference shares, holders are entitled to receive the dividends in the order they were owed. This characteristic provides a layer of security for investors, as it ensures that they will eventually receive all the dividends they are owed, even if there are periods of financial difficulty for the issuing company. This is particularly important in economic downturns or situations where cash flow is problematic.

The other options do not fully capture the nature of cumulative preference shares. While it can be stated that they provide fixed preferred dividends, and current dividends are indeed part of what is guaranteed, the distinguishing feature of cumulative preference shares is the ability to also receive back dividends that were not paid in prior years. The essence of cumulative features emphasizes the requirement for all unpaid dividends to be addressed, reinforcing the obligation of the issuing company to fulfill these financial commitments to preference shareholders.