Preferred Stock Rate of Return Calculator
Calculate the current yield (rate of return) for preferred shares based on dividend payouts.
Understanding Preferred Stock Rate of Return
Preferred stock is often described as a "hybrid" security because it possesses characteristics of both common stocks and corporate bonds. Unlike common stock, preferred stock usually pays a fixed dividend, making it highly sensitive to interest rate changes. The Rate of Return (also known as the Current Yield) is the primary metric investors use to value these assets.
The Calculation Formula
The math behind preferred stock returns is straightforward because the dividends are generally fixed. The formula used by this calculator is:
Rate of Return = (Annual Dividend / Current Market Price) × 100
Key Factors to Consider
- Par Value: Most preferred stocks have a fixed par value (often $25 or $100). The annual dividend is usually calculated as a percentage of this par value.
- Inverse Relationship: As the market price of the preferred stock rises, the rate of return (yield) falls. Conversely, if the price drops, the yield increases.
- Call Risk: Many preferred stocks are "callable," meaning the issuer can buy them back at a specific price after a certain date. This can affect your actual realized return.
Suppose you are looking at a preferred stock that pays a fixed annual dividend of $6.00. The stock is currently trading on the market for $80.00 per share.
Calculation: ($6.00 / $80.00) = 0.075 or 7.5% Rate of Return.
Why Calculate the Rate of Return?
Investors use this calculator to compare preferred stocks against other income-generating investments like Treasury bonds or high-yield savings accounts. Since preferred stock sits higher in the capital structure than common stock but lower than bonds, the rate of return should ideally compensate the investor for the specific level of risk involved.