A classification of preferred stock that gives shareholders even more significant financial benefits than ordinary preferred stock does.
Preferred stock grants shareholders preferential treatment when it comes to dividend payments as compared to the rights granted to holders of common stock. When shareholders own participating preferred stock, they benefit from the dividend rate afforded to preferred stockholders in addition to another dividend tied to a predetermined condition. In the event of liquidation, participating preferred stock priority ranks below debt but above ordinary preferred stock and common stock. In short? Holding shares of participating preferred stock is not a bad gig.
It is worth noting that most of the time, participating preferred stockholders only receive their additional dividend (in addition to the preferred stock dividend rate) in the event that holders of common stock receive a dividend amount beyond a specific per-share rate. The additional dividend benefit that sets participating preferred shares apart is therefore not a “sure thing” but it is certainly nice when it pays off!
Spouse: (Raises eyebrow)
Wife: “The common stock price per share dividend rate just hit the target I had been hoping for. This means that our participating preferred stock shares are going to pay out even more than they already would have this quarter.”
Wife: “Yes, you can buy the new TV you’ve been eyeing.”