Investing
Compute current yield and yield-to-call for preferred shares
Factor in call price and date to see potential yield
Preferred stocks are hybrid securities blending characteristics of stocks and bonds, offering fixed dividend payments with priority over common stock dividends. Preferred shareholders receive regular income (typically quarterly) at a predetermined rate, making them attractive for income-focused investors. Unlike bonds, preferred stocks have no maturity date (perpetual) and no legal obligation to pay dividends, though omitting them is rare and damages company reputation. They rank above common stock in bankruptcy liquidation but below debt holders. Preferred stocks offer higher yields than bonds but lower growth potential than common stocks, making them suitable for conservative income strategies.
Preferred dividends are paid at a fixed percentage of the stock's par value (typically $100), usually quarterly. If a preferred stock has a 6% dividend rate and $100 par value, it pays $6 annually ($1.50 per quarter). Current yield is calculated by dividing the annual dividend by the current stock price. If you buy at $95, the yield increases to 6.32%; if you buy at $105, it decreases to 5.71%. This inverse relationship between price and yield means preferred stock prices fluctuate with interest rates—rising when rates fall and declining when rates rise.
Annual Dividend = Par Value × Dividend Rate. Current Yield = Annual Dividend / Current Stock Price × 100%. Dividend per Quarter = Annual Dividend / 4. Total Annual Return (including price appreciation/depreciation) = (Dividend + Price Change) / Purchase Price × 100%.
Preferred dividends are paid at a fixed rate and have priority—they must be paid before any common stock dividends. Common dividends are variable and declared at the company's discretion. Preferred shareholders receive consistent, predictable income, while common shareholders benefit from potential capital appreciation and discretionary dividends during profitable years.
Companies rarely skip preferred dividends because it damages credit ratings and stock value. However, if missed, the treatment depends on whether the preferred is cumulative (unpaid dividends accumulate and must be paid before common dividends) or non-cumulative (missed payments are forfeited). Cumulative preferreds are generally safer.
Preferred stocks compete with bonds for investor capital. When interest rates rise, newly issued bonds offer higher yields, making existing preferreds less attractive and reducing demand (lowering prices). When rates fall, existing preferreds become more attractive, increasing demand and prices. This interest-rate sensitivity makes preferreds useful in falling-rate environments.
