Rate of Return on Preferred Stock Calculator
Calculate the expected yield based on dividends and current market price.
What is the Rate of Return on Preferred Stock?
The rate of return on preferred stock, often referred to as the current yield, is the annual dividend income generated by a preferred share relative to its current market price. Unlike common stock, preferred stock dividends are typically fixed, making them behave more like bonds than traditional equities.
The Rate of Return Formula
To calculate the rate of return (yield) for preferred stock, we use the following formula:
Where:
- Annual Dividend: The total dollar amount paid to the shareholder over one year.
- Current Market Price: The price at which the share is currently trading on the open market.
Example Calculation
Suppose you are looking at a preferred stock issued by a utility company. The stock pays a fixed annual dividend of $6.00 per share. If the current market price of the stock is $85.00, the calculation would be:
Rate of Return = ($6.00 / $85.00) = 0.07058 or 7.06%
Key Factors Influencing Preferred Stock Yields
Investors should be aware that several factors can impact the market price and, consequently, the rate of return:
- Interest Rates: Preferred stocks have an inverse relationship with interest rates. When market interest rates rise, the price of existing preferred stock usually falls to make its fixed dividend competitive.
- Credit Rating: The financial health of the issuing company affects the risk premium. Higher-risk companies must offer a higher yield to attract investors.
- Call Provisions: Many preferred stocks are "callable," meaning the issuer can buy them back at a specific price after a certain date. This can limit potential upside for investors.
Why Invest in Preferred Stock?
Preferred stock sits between bonds and common stock in a company's capital structure. It offers higher dividend yields than common stock and more security in the event of liquidation, though it usually lacks voting rights. Income-focused investors often use this calculator to compare different preferred issues to find the best risk-adjusted yield.