# Participating Preferred Stock: Key Insights on Dividends & Liquidation

## What Is Participating Preferred Stock?

Participating preferred stock gives investors two ways to earn [dividends](https://www.investopedia.com/terms/d/dividend.asp): a fixed [preferred dividend](https://www.investopedia.com/terms/p/preferreddividend.asp) and a share of additional profits, in addition to common stock dividends. It gets paid before common stock but after any company debt. Companies sometimes use this type of stock in strategies like poison pills to protect against takeovers. Participating preferred stock offers benefits like extra dividends and priority in liquidation. Unlike nonparticipating preferred stock, which only pays the fixed dividend, participating stock allows investors to share in extra profits.

### Key Takeaways

*   Participating preferred stockholders earn both standard preferred dividends and additional dividends under specific conditions.  
    
*   These shares sit above common stock but below debt in a capital structure, with superior liquidation preferences.  
    
*   Participating preferred shareholders can receive both their investment back and a share of residual liquidation proceeds.  
    
*   The additional dividends are contingent on common shareholders receiving dividends beyond a set threshold.  
    
*   Participating preferred stock is rare but strategic, often used in poison pill defenses against takeovers.

## In-Depth Analysis of Participating Preferred Stock Features

Participating preferred stock—like other forms of preferred stock—takes precedence in a firm's capital structure over common stock but ranks below debt in liquidation events. The additional dividend paid to preferred shareholders is commonly structured to be paid only if the amount of dividends that [common shareholders](https://www.investopedia.com/terms/c/common_shareholder.asp) receive exceeds a specified per-share amount.

In [liquidation](https://www.investopedia.com/terms/l/liquidation.asp), participating preferred shareholders can get back their purchase price and a share of remaining proceeds.

In a liquidation, whether a stock is participating or nonparticipating decides if investors get more than the stock's liquidation value and dividends. Participating preferred stockholders get remaining value after liquidation, similar to common stockholders. Nonparticipating preferred shareholders, on the other hand, receive their liquidation value and any dividends in arrears if applicable, but they are not entitled to any other consideration.

Participating preferred stock is rare, but it can serve as a [poison pill](https://www.investopedia.com/terms/p/poisonpill.asp), giving current shareholders rights to buy new common shares cheaply during an unwanted takeover.

## Real-World Examples of Participating Preferred Stock Applications

Suppose Company A issues participating preferred shares with a dividend rate of $1 per share. The preferred shares also carry a clause on extra dividends for participating preferred stock, which is triggered whenever the dividend for common shares exceeds that of the preferred shares. If during its current quarter, Company A announces that it will release a dividend of $1.05 per share for its common shares, the participating preferred shareholders will receive a total dividend of $1.05 per share ($1.00 + 0.05) as well.

In liquidation, Company A has $10 million in participating preferred stock, 20% of its capital. The rest, $40 million, is common stock. Company A liquidates, and the proceeds are $60 million. The participating preferred shareholders would receive $10 million, but also would be entitled to 20% of the remaining proceeds. That amount would be $10 million, calculated as 20% x ($60 million - $10 million). Nonparticipating preferred shareholders would not receive additional consideration.  

## The Bottom Line

Investors who own participating preferred stock can earn through a regular fixed dividend and a potential extra dividend, which can increase their total payouts. These shares rank above common stock but below debt, offering investors a balance of security and risk. If a company liquidates, holders may get back their original investment plus a share of remaining funds, giving more protection than nonparticipating preferred stock. Companies can also use these shares to protect themselves against hostile takeovers.

**_Correction—Nov. 4, 2022_:** A previous version of this article misstated the calculation in an example for the additional amount to be received by participating preferred shareholders from a liquidation.