Participating Preferred Stock: Shares That Offer Both Fixed Dividends and Extra Profit Potential

Participating preferred stock is a type of preferred share that gives its holders the right to receive fixed dividends — like regular preferred stock — plus an additional share of profits if the company performs well.
It combines the stability of preferred dividends with the growth potential of common stock.

In simple terms, participating preferred stock allows investors to earn their guaranteed dividend and then “participate” in extra profits if the company pays higher dividends to common shareholders or is sold for a large gain.

Core Idea

Preferred shares normally pay a fixed dividend and rank ahead of common stock in receiving payouts or liquidation proceeds.
However, participating preferred shares go a step further: after receiving their fixed dividend, they also share in any additional earnings distributed to common shareholders.

This makes them more valuable to investors but also more expensive for companies to issue.

In Simple Terms

Owning participating preferred stock is like getting a guaranteed paycheck plus a performance bonus when the company does well.

Example

Imagine a company issues participating preferred shares with:

A fixed 6% annual dividend, and

The right to share equally in any extra dividends paid to common shareholders.

If common shareholders later receive an additional 4% dividend, the participating preferred holders also receive that extra 4% on top of their 6%, for a total of 10%.

In the event of liquidation, they would get:

Their original investment back,

Any unpaid fixed dividends, and

A proportionate share of any remaining proceeds alongside common shareholders.

Real-Life Application

Participating preferred stock is often used in:

Private equity and venture capital, where investors want downside protection (via fixed dividends) and upside participation (if the company succeeds).

Corporate financing, when companies want to attract investors willing to provide capital but still retain control of common shares.

It offers a balance between safety and reward, making it attractive to institutional or early-stage investors.

Advantages

Provides guaranteed income through fixed dividends.

Offers additional profit potential when the company performs well.

Has priority over common stock in dividends and liquidation.

Helps investors capture both income stability and growth upside.

Risks and Considerations

Complexity: Terms vary by company — investors must read the fine print.

Dilution risk: Participating rights may reduce the amount left for common shareholders.

Limited voting rights: Preferred shareholders typically have less control than common shareholders.

Lower liquidity: These shares are often issued privately, not traded on major exchanges.

Common Misconceptions and Mistakes

“All preferred shares participate in profits.” Only participating preferred stock has this feature; most preferred shares receive fixed dividends only.

“Participation guarantees higher returns.” Participation only applies if extra dividends or liquidation gains occur.

“It’s the same as convertible preferred stock.” Convertible shares can be turned into common stock; participating preferred cannot unless specified.

“Companies always issue them.” They are less common because they can be costly for issuers.

Related Queries Investors Often Search For

What is the difference between participating and non-participating preferred stock?

How do participating preferred shareholders benefit during liquidation?

Why do venture capitalists prefer participating preferred shares?

Are participating preferred shares better than common stock?

How are dividends calculated for participating preferred stock?

Summary

Participating preferred stock gives investors the right to receive fixed dividends plus a share of any extra profits paid to common shareholders.
It combines income stability with upside potential, offering both security and participation in growth.
This type of stock is popular in private equity and venture funding, where investors seek both protection and the chance to share in a company’s future success.