How to Calculate the Return on Initial Investment of Preferred Stock

by C. Taylor, studioD

A preferred stock is similar to a common stock, except it takes priority when the company distributes dividends or liquidates assets. Preferred stocks are quantified with a par value, which represents the claim one share holds against the overall value of the company. The return on investment for preferred stock comes in the form of dividends, which are calculated by the preferred dividend rate.

Contact your investment broker and ask for the preferred stock's par value and preferred dividend rate.

Multiply the preferred dividend rate by the par value. As an example, if a preferred stock has a par value of $80 and a preferred dividend rate of 10 percent, then you would multiply $80 times 0.10 to calculate the annual preferred dividend payment of $8 per share.

Divide the annual preferred dividend payment by your original purchase price. This gives you your annual return on investment. In the example, if you originally purchased the preferred stock for $64, then your annual return on investment is 0.125, or 12.5 percent. This rate of return holds for any number of shares you may have purchased, so you need not calculate your total costs nor total dividends paid.

About the Author

C. Taylor embarked on a professional writing career in 2009 and frequently writes about technology, science, business, finance, martial arts and the great outdoors. He writes for both online and offline publications, including the Journal of Asian Martial Arts, Samsung, Radio Shack, Motley Fool, Chron, Synonym and more. He received a Master of Science degree in wildlife biology from Clemson University and a Bachelor of Arts in biological sciences at College of Charleston. He also holds minors in statistics, physics and visual arts.