Preferred stock is distinct from common shares of stock for a number of reasons. Preferred shares carry less risk but don't have voting rights at stockholders' meetings and usually less growth potential. Investors buy preferred shares mainly as a source of income. That's because preferred shares pay a predetermined and guaranteed dividend that is usually much higher than common stock dividends. However, preferred stock is traded on the market just like common stock, and the price changes. In order to calculate preferred stock return you have to take into account both price changes and dividend earnings.
Things You'll Need
- Preferred stock prospectus
- Transaction records
Find the dividend rate for the preferred stock. This is available from your broker and is also listed in the stock prospectus. The dividend rate is usually listed as a percentage of the original issue price (also called the par value) of preferred shares. Convert the dividend rate to a dollar amount by multiplying the rate times the par value of the stock. For example, if the par value is $80/share and the dividend rate is 6.5 percent, the stock pays a dividend of $5.20/year.
Refer to your transaction records to find the price paid for the stock and any purchase fees or commissions. Add these amounts together to find the cost basis for the stock. If the stock has been sold, you should also add sales costs to produce a final cost basis figure.
Subtract the cost basis from the current (or the sale) price for the stock to find the capital gain (or loss). For example, if the cost basis is $75/share and you sold the stock for $100/share, you have $100 - $75 = $25. If the answer is negative, you have a capital loss on the investment.
Total the dividends you have received. For tax purposes, dividends are classed as regular income, not capital gains, so it's best to keep track of them separately. However, you combine capital gain/loss with dividend earnings to find the total return on preferred shares. For instance, in our examples above you would have a capital gain of $25 plus dividends of $5.20 (assuming you held the stock for one year) for a total return of $31.20 for each preferred share.Convert the dollar return to percentage return by dividing the total dollar return by the cost basis and multiplying by 100. Using the examples above, you have ($31.20/$75)*100 = 41.6 percent.
Convert the dollar return to percentage return by dividing the total dollar return by the cost basis and multiplying by 100. Using the examples above, you have ($31.20/$75)*100 = 41.6 percent.
- Examples of Preferred Stocks
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