Heritable symbioses can have important ecological effects and have triggered important evolutionary innovations. Current predictions for long-term symbiont prevalence are based on their fitness benefits and vertical transmission rates but ignore nonlinear competitive feedbacks among symbiotic and symbiont-free hosts. We hypothesized that such feedbacks function as stabilizing mechanisms, promoting coexistence of host types and maintaining intermediate symbiont frequency at the population scale. Using a model grass/endophyte symbiosis, we manipulated competition within and between endophyte-symbiotic (E+) and endophyte-free (E-) hosts and fit competition models to experimental data. We show for the first time that symbiont-structured competition can generate stable coexistence of E+ and E- hosts, even under perfect vertical transmission. Niche differentiation was the key to coexistence, causing hosts of each type to limit themselves more strongly than each other. These results establish roles for nonlinear competitive dynamics and niche differentiation in the ecology and evolution of heritable symbionts.