Participating preferred stocks are a type of preferred stock that give stockholders additional dividends if the company hits certain predetermined targets. Should the company be unable to reach their sales or profit goals, stockholders should still be able to receive the regular dividend, as long as the company performs well enough to continue with its pay outs.
Participating preferred stocks provide benefit to investors, who cannot receive less than the set dividend, and are only poised to receive more, should conditions be favorable for the company. In the event of asset liquidation, holders of participating preferred stocks usually receive a pay out for the initial investment and dividends, as well as the right to participate in the distribution of remaining assets and common stocks.
Participating preferred stocks are not issued very often. However, they can benefit the company by acting as a poison pill to discourage hostile takeovers. Should the company be taken over, shareholders should receive new common shares at much lower prices.
