A profit sharing bond is a fixed income security whereby the holder receives regular interest payments and a share in the profits or dividends of the bond-issuing company.
Profit sharing bonds are also called dividend bonds or participating bonds because bond holders participate in the company's profits, typically paid out as dividends.
Dividends on a profit sharing bond may either be limited to a fixed amount--a fixed percent of company profit, or be the same as regular dividends paid to shareholders.
Profit sharing bonds have the safety of regular bonds including interest payments and the profit-sharing upside of stocks, without the downside risks associated with stocks such as capital loss from a drop in share price.
Profit sharing bonds cannot be converted into shares of the company. If the bond-issuing company grows its profits handsomely, profit sharing bondholders lose out on considerable upside.
History and Popularity
Profit sharing bonds debuted in the late 19th century. As of 2010, profit sharing bonds were not widely issued because they reduce shareholder value. Issuing companies instead opt for regular bonds, convertible bonds or preferred shares.