Participating preferred stock
Participating preferred stock is preferred stock that can receive dividends above its stated rate, sharing in additional payouts alongside common stockholders when the issuer's board declares them.
Participating preferred stock is a type of preferred stock that pays its fixed, stated dividend and can also participate in extra dividends beyond that rate. When the issuing company has a strong year and its board declares additional dividends, participating preferred holders share in the upside alongside common stockholders — something ordinary (non-participating) preferred stock never does.
For example, a 5% participating preferred stock with a $100 par value is entitled to its $5 annual dividend first. If the board then declares a further payout to shareholders, the participating preferred holders receive an additional dividend on top of the $5, up to whatever terms the stock's charter sets. The exact participation formula varies by issue, but the defining feature is the ability to earn more than the stated rate.
This feature makes participating preferred more attractive than a plain preferred with the same stated rate, because it keeps some of common stock's upside while retaining preferred stock's priority for dividends and liquidation. The trade-off is that participating issues are relatively rare, and the extra dividends are never guaranteed — they depend entirely on the board declaring them.
On the SIE, Series 6, and Series 65 exams, participating preferred appears alongside the other preferred stock flavors — cumulative, convertible, and callable. Be able to match each feature to its definition: participating means the possibility of dividends above the stated rate, not a guarantee of them.
Key takeaways
- Participating preferred stock receives its stated dividend plus potential additional dividends shared with common stockholders.
- Extra dividends are paid only if the board of directors declares them — participation is a possibility, not a guarantee.
- It combines preferred stock's dividend and liquidation priority with some of common stock's upside.
- Exams test participating preferred alongside cumulative, convertible, and callable preferred — know each feature's definition.