# Dividend Classification by Nature of Shares
Dividend rights depend on the class of shares — preference or equity.
## 1. Preference Shares
- Fixed rate of dividend, payable in preference to equity shareholders.
- Preference dividend is non-cumulative by default unless the terms of issue say otherwise — meaning if profits are insufficient, the dividend lapses.
### Sub-classification
| Type | Behaviour on Non-Declaration |
|---|---|
| Cumulative Preference Shares | Dividends accumulate. Any arrears must be paid before any dividend is paid to equity shareholders. |
| Non-Cumulative Preference Shares | Dividends are payable only when there are profits. If not declared in a year, the right lapses — no arrears carry forward. |
## 2. Equity Shares
- Rate of dividend is recommended by the Board and varies year to year.
- Depends on:
- The company's dividend policy
- Available distributable profits
- Only after preference shareholders' rights have been satisfied.
## Logic
Preference shareholders accept a fixed return in exchange for priority of payment. Equity shareholders take residual risk but enjoy the residual reward — there is no ceiling for them when profits are abundant.
## Key Takeaway
Think of preference shares as 'first in queue, fixed plate'; equity shares as 'last in queue, eat whatever's left'. Cumulative preference adds the extra protection of unpaid years carrying forward as a charge before equity can be served.