What is participating dividend?
Participating dividend gives the receiver a right to participate in the profits of a
company.
It gives a right to get a percentage of a company's profits over the fixed dividend
payment.
Unlike a cash dividend, it is not just a percentage of the nominal value of the shares held.
A participating dividend is received by holders of a participating preferred stock of a company.
They offer earnings and liquidation rights to the beneficiaries.
These rights make participating dividends a lucrative return on investment.
Frequently Asked Questions (FAQ)
How do you calculate participating dividends?
On a participating preferred dividend, companies may pay dividends annually, semi-annually,
or quarterly.
The receivers of participating dividends are entitled to receive a portion of retained
earnings in addition to the fixed dividend payment.
Determining fixed component-
To compute the fixed dividend on a participating preferred stock, first, the rate of dividend
needs to be determined.
The rate is often given in the prospectus for preferred stocks issued.
For example, consider that Melodius Limited has declared a 4% return on participating
preferred stocks.
So, the fixed component of the dividend will be at 4%.
Next, we will determine the par value of participating preferred stocks.
The par value is also given in the prospectus.
For example, take the par value of Melodius Limited's participating preferred stock as
AU$100.
Now, we can multiply the dividend rate by the par value of the preferred stock.
So, Melodius Limited will be AU$10 x .04 = AU$0.4, which means 40 cents is the dividend payment
per share of participating preferred stock.
We can multiply the dividend payment per share by the number of participating preferred shares
issued by Melodius Limited.
For example, the number of shares issued is 1,000,000 participating preferred shares.
Then, the total participating preferred dividend paid by Melodius limited will be 1,000,000
x AU$0.4 = AU$400,000.
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What are participating preferred stocks?
A participating preferred stock is a type of preference share and is treated on priority
over common shares.
Usually, the amount of dividend paid on the preference shares is based on the nominal
value of these shares.
However, in the case of participating preferred stocks, the dividends are based on profits
earned.
So just like their name, these shares participate in the profits.
Therefore, such dividends are participating dividends.
At the time of liquidation, participating preferred shareholders may also have the right
to receive back the stock's purchasing price along with a pro-rata share of any remaining
liquidation proceeds.
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What are the benefits of participating dividends?
The benefits to investors from participating dividends accrue from investing in participating
preferred stocks.
Few of these are-
These dividends give a higher rate of return compared to only cash dividends on common
stock.
Investors will get the fixed dividend component even when earnings are low, or the company
turns loss-making.
It gives a chance of participation in profits and higher returns in exceptionally well years.
A participating dividend has 'downside protection' and 'upside benefits'.
Shareholders entitled to participating dividends are next in line after debt holders in case
of liquidation.
Beneficiaries of participating dividends can also claim any leftover surplus of liquidation
expenses.
In liquidation, receivers of participating dividends get priority since they are a type
of preferential shareholders.