Future Business Leaders of America (FBLA) Securities and Investments Practice Test

Which type of preferred stock often raises its dividend above the stated rate?

1. Convertible preferred stock

2. Cumulative preferred stock

3. Participating preferred stock

4. Non-cumulative preferred stock

The correct answer is: Participating preferred stock

Participating preferred stock is the correct answer because it offers a unique feature that allows shareholders to receive dividends that can exceed the stated fixed dividend rate. In addition to receiving the standard dividend, participating preferred shareholders are entitled to additional dividends based on certain conditions, typically when common stockholders receive dividends above a specified level. This type of preferred stock essentially gives investors the potential to benefit from a company's profitability beyond just the fixed nature of typical preferred dividends, aligning their interests more closely with common stockholders. The other types of preferred stock, while they have their distinct characteristics, do not provide this ability to increase dividends beyond the stated rate. Convertible preferred stock can be converted into common shares, but the dividend remains fixed. Cumulative preferred stock ensures that unpaid dividends accumulate, but again, the rate itself does not increase beyond what's originally stated. Non-cumulative preferred stock means that if dividends are not paid in a given period, they do not accrue, leaving shareholders without the potential for increased dividends. Therefore, participating preferred stock stands out for its potential to raise dividends based on the company's performance.