How to Calculate Preferred Stock Dividends


Because preferred stock does not have a stated maturity date, computing dividends is measured by calculating its current yield, its accrued yield and its taxable yield equivalent. As a result, a given preferred stock may have a yield that is different in every tax situation.

A given preferred stock may have a yield that is different in every tax situation.
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Step 1

Compute current yield by dividing the amount of the next dividend by the stock price. Multiply the result by the ordinary number of payments in a year.

Step 2

Accumulate arrears in preferred stocks. This means the preferred stock dividend was skipped at previous due dates. Cumulative preferred stock dividends in arrears accrue until paid. Thus, a $2 annual dividend that has not been paid in two years trading at $16 (its par value is $25 per share) has a current yield in arrears of ( 2 x $2) / $16, or 4/16 or 25 percent.

Step 3

Compute total return for a preferred stock you expect to be defeased soon. If a bond is being called, its yield to call is the difference from par plus any arrears. In the case above, the total return is $25 -- $16, or $9, plus the $4 dividend divided by the current price of $16. In other words ($9 + $4) = $13; $13 / $16 is 81.25 percent. The time horizon is ignored.

Step 4

Trade preferred stocks on their current yield and relative attractiveness to corporate bonds. Preferred stocks do not have maturities. Instead, they remain in the secondary market until they are called by the issuer, usually with only 30 days' notice. Use the computation that is most appropriate for your needs.

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