Preferred Stock Yield Calculator
Compute current yield and yield-to-call for preferred shares
Additional Information and Definitions
Purchase Price
The price you pay per preferred share. Most preferred stocks are issued at $25 par value but can trade above or below this price. Your purchase price affects your actual yield and potential return if called.
Annual Dividend Rate (%)
The annual dividend as a percentage of par value. For example, a 6% rate on $25 par value pays $1.50 annually. This rate is typically fixed for traditional preferred stocks but can be floating or adjustable.
Par Value
The face value of the preferred stock, usually $25 or $100. This is the base for calculating the dividend payment and typically the price at which the stock can be called. Most retail preferred stocks use $25 par value.
Years to Possible Call
Time until the issuer can redeem (call) the shares at the call price. Most preferred stocks become callable after 5 years. Enter 0 if already callable or if there's no call provision.
Call Price
The price at which the issuer can redeem the shares, typically par value. Some issues have premium call prices or declining scales. This affects your yield-to-call calculation and potential return.
Evaluate Your Preferred Stock Returns
Factor in call price and date to see potential yield
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Understanding Preferred Stock Terms
Key concepts for evaluating preferred stock investments and yields
Par Value:
The nominal or face value of the preferred stock, typically $25 or $100. This serves as the basis for dividend calculations and usually equals the call price. Most retail preferred stocks use $25 par value for broader market accessibility.
Current Yield:
The annual dividend payment divided by the current market price, expressed as a percentage. This represents your actual dividend yield based on your purchase price, not the stated rate based on par value.
Yield to Call:
The total return you would receive if the preferred stock is called at the earliest possible date. This includes dividends received plus any gain or loss from the difference between your purchase price and the call price.
Qualified Dividend:
Dividends that qualify for lower tax rates than ordinary income. Most preferred stock dividends are qualified if held for at least 61 days, though bank preferred stocks often are not.
Cumulative Preferred:
A type of preferred stock where missed dividend payments accumulate and must be paid before any common stock dividends. This feature provides additional dividend security for investors.
Fixed-to-Floating Rate:
Preferred stocks that pay a fixed rate for an initial period, then switch to a floating rate based on a reference rate plus a spread. This structure can provide protection against rising interest rates.
5 Essential Preferred Stock Investing Strategies
Preferred stocks offer higher yields than bonds with some unique advantages and risks. Master these strategies to optimize your preferred stock investments:
1.Call Protection Analysis
Understanding call provisions is crucial for preferred stock investing. When a preferred stock trades above its call price, there's risk of capital loss if called. However, some investors intentionally buy callable preferred stocks above par, calculating that the higher yield justifies the call risk. Always compare yield-to-call with current yield when evaluating callable preferred stocks.
2.Interest Rate Risk Management
Preferred stocks typically have long or perpetual terms, making them sensitive to interest rate changes. When rates rise, preferred stock prices often fall to maintain competitive yields. Consider fixed-to-floating rate preferreds or those with shorter call protection periods to reduce interest rate risk. Some investors ladder their preferred stock investments across different call dates for better rate exposure management.
3.Credit Quality Evaluation
Preferred stocks are junior to bonds but senior to common stock in the capital structure. This position means credit quality assessment is crucial. Look for issuers with strong interest coverage ratios and stable business models. Banks and utilities often issue preferred stocks due to regulatory capital requirements, providing relatively stable dividend payments.
4.Tax Advantage Optimization
Most preferred stock dividends qualify for lower tax rates than ordinary income, significantly boosting after-tax yields. However, bank preferred stock dividends typically don't qualify for this treatment. Calculate your after-tax yield based on your tax situation and the specific preferred stock's dividend tax treatment. Some investors focus on qualified dividend preferreds in taxable accounts while holding non-qualified ones in tax-advantaged accounts.
5.Liquidity Risk Consideration
Preferred stocks often trade with lower liquidity than common stocks or bonds, particularly during market stress. This can lead to wider bid-ask spreads and difficulty executing trades at desired prices. Focus on preferred stocks with higher trading volumes and consider setting limit orders rather than market orders. Some investors maintain a portion of their preferred stock allocation in preferred stock ETFs for better liquidity.