If preferred stock is participating, it can receive dividends above its stated dividend rate. For example, if you own a $100 par, 5% preferred share, the stated dividend is $5 per year per share (assuming the board of directors declares the dividend).
With participating preferred stock, you may receive more than $5 per year in a strong year. When the issuer has a particularly profitable year, it may pay an additional dividend to participating preferred stockholders.
Because this feature can increase the dividends you receive, participating preferred stock is generally beneficial to the stockholder. As a result, it tends to trade at higher market prices (higher demand). Remember: higher prices mean lower yields. For the same reason, issuers often sell participating preferred stock with lower stated dividend rates when the shares are first issued.
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