If a company goes bankrupt and has to liquidate its assets, owners of preferred stock get preference over owners of common stock when it comes to being paid. Until that point, however, preferred stock owners cannot vote on company business like common stock holders can. Preferred stock pays regular dividends to its owners from the company's after-tax income. Many investors consider it a hybrid security because it has features in common with both common stock and bonds.
Step 1
Determine the dividend on the preferred stock. Preferred stock generally pays a fixed dividend, so you will know how much the stock is going to pay the stock owner each year. For example, assume the dividend of the preferred stock is $12 per share annually. If the dividend is paid quarterly, you will need to multiply it by 4 to get the annual dividend.
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Step 2
Determine the selling price of the preferred stock. Businesses will have to deal with flotation costs in calculating a stock price, but an individual investor can simply look at the price that the stock is being offered for. For example, assume preferred stock in company ABC is being offered at $200 a share.
Step 3
Divide the expected dividend per share by the price per share of the preferred stock. With our example, this would be $12/$200 or .06. Multiply this answer by 100 to get the percentage rate of return on your investment. In our example, .06 x 100 = 6 so the rate of return for the preferred stock is 6 percent per year.
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