Participating Preferred Stock Definition & Examples
A participating preferred stock is a type of security that gives the holder certain rights to participate in the profits of the company. This includes both regular dividends and any special dividends that are paid out.
In addition, participating preferred shareholders usually have priority over common shareholders when it comes to receiving assets if the company goes bankrupt.
This means that, if the company liquidates, preferred shareholders usually receive their initial investment before common shareholders. Depending on the nature of the company, this can be a very important benefit.
Shareholders who own participating preferred stock are usually paid quarterly dividends, except in cases where the dividend is less than $1 per share.
They also enjoy all benefits of common shareholders and receive voting rights, but their votes are generally weighted more heavily than those of common shareholders.
In other words, a participating preferred shareholder has a higher level of protection and a greater say in how the company is run than a common shareholder.
Why Would You Want to Purchase One?
There are several reasons why you might want to purchase a participating preferred stock.
First, they offer a higher dividend yield than regular preferred stocks. This is because participating preferred shareholders have a higher priority when it comes to receiving dividends.
Second, they offer a higher degree of protection than regular preferred stocks. If the company goes bankrupt, participating preferred shareholders are more likely to receive their investment back than common shareholders.
Third, they give you a voice in how the company is run. Unlike common shareholders, your vote will carry more weight when it comes to decisions about the company’s future.
Finally, they are a good investment for risk-averse investors. Since they offer both safety and dividends, they provide a lower-risk investment than regular common stocks.
How Much Do They Cost?
The price of a participating preferred stock varies depending on the company and the terms of the security. However, they usually cost more than regular preferred stocks.
In 2021, the average price of a participating preferred stock was $1,034.72, while the average price of a regular preferred stock was $882.14.
How to Buy or Sell Preferred Stocks?
As with most investments, you can buy or sell participating preferred stocks through an investment professional.
If your broker does not offer participating preferred stock, you will need to find someone who specializes in them.
When buying a participating preferred stock, keep in mind that the price is usually higher than the regular preferred shares of the company, so be sure to do your research and determine the value of the company.
Examples of Participating Preferred Stock
Let’s look at the examples of a participating preferred stock.
XYZ Corporation has a series of participating preferred shares with a $25 par value. The shares pay quarterly dividends of $0.50 per share.
If you purchase one of these shares, you will receive $0.50 in dividends every quarter, regardless of the company’s financial condition. In addition, you will have priority over common shareholders if the company goes bankrupt.
ABC Corporation has a series of outstanding participating preferred shares with a par value of $100.
The dividend for this share is currently set at $5 per year, but it will increase to $6 annually beginning in January 2022. You can purchase these shares from someone who already holds them as early as January 2022.
In addition, the company has the option to buy back all participating preferred shares for $115 per share at any time after December 31, 2021.
Benefits of Preferred Stock
There are several benefits associated with participating preferred shares:
This makes them a good investment for risk-averse investors.
Participating preferred stockholders have creditor priority, which means they come before other shareholders in case of bankruptcy. This ensures that their investment is protected from any losses or liabilities incurred by the company.
More Involved Management
Since shareholders with a high level of participation usually control a majority of the votes, they are able to have a greater say in how the company is run.
This gives investors a higher degree of protection and a voice in the management of their investment.
Disadvantages of Preferred Stocks
There are also a few disadvantages associated with owning participating preferred stock:
Non-Participating Preferred Stock
If the company declares a dividend, you do not receive it. This means that your dividends are only given if the company opts to pay them.
Participating preferred stock usually has a higher price than common stock equivalents, making them less accessible for retail investors.
Because participating preferred stocks are issued by individual companies, they are not as diversified as other types of investments. This increases the risk associated with investing in them.
These stocks are less liquid than regular common stocks, which means it can be harder to sell them when you need to.
Participating preferred stock can be a great investment for risk-averse investors who want to receive quarterly dividends and have creditor priority in case of bankruptcy.
However, they are usually more expensive than common stock equivalents and are less liquid.
In this situation, you will need to determine how much risk you are willing to accept when looking at various types of investments.
The next step is to do your research on the company prior to investing in their preferred shares, as this will help you determine if they are a good choice for you.
If nothing else, participating preferred stocks are an interesting alternative that may give regular common stockholders more control over their investment.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.