diff --git a/src/cdk/overlay/keyboard/overlay-keyboard-dispatcher.spec.ts b/src/cdk/overlay/keyboard/overlay-keyboard-dispatcher.spec.ts
index 045299ed6aad..4e219324ce70 100644
--- a/src/cdk/overlay/keyboard/overlay-keyboard-dispatcher.spec.ts
+++ b/src/cdk/overlay/keyboard/overlay-keyboard-dispatcher.spec.ts
@@ -69,6 +69,23 @@ describe('OverlayKeyboardDispatcher', () => {
     expect(overlayTwoSpy).toHaveBeenCalled();
   });
 
+  it('should dispatch keyboard events when propagation is stopped', () => {
+    const overlayRef = overlay.create();
+    const spy = jasmine.createSpy('keyboard event spy');
+    const button = document.createElement('button');
+
+    document.body.appendChild(button);
+    button.addEventListener('keydown', event => event.stopPropagation());
+
+    overlayRef.keydownEvents().subscribe(spy);
+    keyboardDispatcher.add(overlayRef);
+    dispatchKeyboardEvent(button, 'keydown', ESCAPE);
+
+    expect(spy).toHaveBeenCalled();
+
+    button.parentNode!.removeChild(button);
+  });
+
   it('should dispatch targeted keyboard events to the overlay containing that target', () => {
     const overlayOne = overlay.create();
     const overlayTwo = overlay.create();
diff --git a/src/cdk/overlay/keyboard/overlay-keyboard-dispatcher.ts b/src/cdk/overlay/keyboard/overlay-keyboard-dispatcher.ts
index d8597a46c6f2..e37799a3faf0 100644
--- a/src/cdk/overlay/keyboard/overlay-keyboard-dispatcher.ts
+++ b/src/cdk/overlay/keyboard/overlay-keyboard-dispatcher.ts
@@ -61,12 +61,12 @@ export class OverlayKeyboardDispatcher implements OnDestroy {
    * events to the appropriate overlay.
    */
   private _subscribeToKeydownEvents(): void {
-    const bodyKeydownEvents = fromEvent<KeyboardEvent>(this._document.body, 'keydown');
+    const bodyKeydownEvents = fromEvent<KeyboardEvent>(this._document.body, 'keydown', true);
 
     this._keydownEventSubscription = bodyKeydownEvents.pipe(
       filter(() => !!this._attachedOverlays.length)
     ).subscribe(event => {
-      // Dispatch keydown event to correct overlay reference
+      // Dispatch keydown event to the correct overlay.
       this._selectOverlayFromEvent(event)._keydownEvents.next(event);
     });
   }
@@ -87,7 +87,7 @@ export class OverlayKeyboardDispatcher implements OnDestroy {
           overlay.overlayElement.contains(event.target as HTMLElement);
     });
 
-    // Use that overlay if it exists, otherwise choose the most recently attached one
+    // Use the overlay if it exists, otherwise choose the most recently attached one
     return targetedOverlay || this._attachedOverlays[this._attachedOverlays.length - 1];
   }