Preferred Stock & Yield

Overview

• Similar to common stock, preferred stock is an equity security that represents ownership in a company.
• Investors typically use preferred stock differently, though.
• Capital appreciation (capital gains, growth, buying low and selling high) isn’t the main reason most investors buy preferred stock (even though it can happen).
• The main benefit is cash dividends.

Cash dividends & par value

Dividends

• Some common stocks pay cash dividends, while others don’t. Dividend payments depend on the size and overall goals of the company.
• With preferred stock, you can generally assume dividends are paid, and the dividend rate is the primary benefit to investors.
• The dividend rate is fixed (it doesn’t change) when the security is sold in the primary market by the issuer. That’s why preferred stock is often treated as a fixed income security.
• This differs from common stock, where dividend amounts can change over time.
• Preferred stock dividends are typically paid quarterly, but you may also see annual or semi-annual payments.
• As with common stock, the Board of Directors (BOD) must approve each dividend when it’s due.
• If the company doesn’t have the funds, the BOD can vote to skip or delay dividends indefinitely. That’s a key risk for investors (revisited in the suitability chapter later in this unit).

Fixed-rate vs. floating-rate preferred stock

Par value

• Issuers sell preferred stock to raise capital (money) from investors.
• At issuance, the stock is assigned a par value (also called face value).
• Par value matters because the dividend rate is applied to par.
• All forms of stock have a par value, including common stock. For common stock, par value is usually an accounting figure with little practical impact. For preferred stock, par value is very important because the annual dividend amount (the main reason investors buy preferred stock) is based on par.
• The typical par value for preferred stock is $100, and you should assume $100 if an exam question doesn’t state a par value. However, other par values exist, including $25 and $50.

🔑 Formula:

Annual dividend = Par value x dividend rate

Worked examples — annual dividends

An investor purchases 100 shares of a $100 par, 5% preferred stock. What is the annual amount of dividends received?

Can you figure it out?

(spoiler) Answer = $500 To find the annual dividend paid to the investor on a per share basis, use this formula: Annual dividend = Par value x dividend rate Annual dividend = $100 par x 5% Annual dividend = $5 If every share pays $5 in annual dividends, then 100 shares will pay a total of $500 ($5 x 100 shares).

Here’s how a different par value changes the payout:

An investor purchases 100 shares of a $25 par, 5% preferred stock. What is the annual amount of dividends received?

(spoiler) Answer = $125 To find the annual dividend paid to the investor on a per share basis, use this formula: Annual dividend = Par value x dividend rate Annual dividend = $25 par x 5% Annual dividend = $1.25 If every share pays $1.25 in annual dividends, then 100 shares will pay a total of $125 ($1.25 x 100 shares).

In these two examples, everything is the same except par value, and that single change produces a different total dividend payout.

Yield

• At issuance (when the issuer first sells the shares), preferred stock is typically sold at par.
• Once it trades in the secondary market, its market price can move up or down, and that price movement directly affects yield.
• Yield is a term often used with bonds, and it describes the overall rate of return on an income-producing investment.

• A 5%, $100 par preferred stock pays $5 per year in dividends. The 5% is the dividend rate, but it isn’t always the yield.
• Par value is fixed, but market price changes. So if a $100 par preferred stock is purchased for $95, the dividend rate stays 5%, but the yield changes.

🔑 Formulas:

Dividend rate formula: DR = annual income ÷ par

Current yield formula: CY = annual income ÷ market price

Worked example — dividend rate vs. yield

An investor purchases a 5%, $100 par preferred stock for $95

Dividend rate:

• Always based on par
• DR = annual income / par
• DR = $5 / $100
• DR = 5.00%
• Never changes

Yield:

• Based on the dividend rate and the price paid for the stock
• CY = annual income / market price
• CY = $5 / $95
• CY = 5.26%
• Fluctuates depending on the market price

Yield is the better snapshot of the investor’s return because it reflects what they actually paid. If the investor pays $95 and receives $5 per year, the return based on the investment amount is 5.26%.

Worked examples — current yields at different market prices

An investor purchases a 5%, $100 par preferred stock

What’s the current yield if purchased for $100?

(spoiler) CY = annual income / market price CY = $5 / $100 CY = 5.00%

And for a market price of $105?

(spoiler) CY = annual income / market price CY = $5 / $105 CY = 4.76%

Discount, par, and premium

Finance professionals often describe market prices relative to par:

• If preferred stock trades below par, it trades at a discount.
• If it trades above par, it trades at a premium.
• If it trades exactly at par, it trades at par value (neither a discount nor a premium).

Interest rates and preferred stock prices

• Many factors can affect preferred stock prices, but the main driver is interest rates.
• Even though preferred stock pays dividends (not interest), its market price is strongly influenced by interest rate changes because preferred stock competes with other fixed-payment investments.

Comparison to bonds

• Bonds are securities (investments), just like preferred stock.
• Bonds have a par value, can trade at discounts and premiums, and have a fixed payment rate.
• When an investor buys a bond from an issuer, the investor receives interest over the life of the bond. In other words, the investor is lending money to the issuer in exchange for interest payments.
• When an issuer sells preferred stock, it considers the interest rate environment because it’s competing with bond issuers for investor capital. If market interest rates are around 5%, it would be difficult to sell a 2% preferred stock. Investors would likely prefer a bond (or other investment) offering a 5% yield.

When interest rates rise

An investor buys a newly issued 5%, $100 par preferred stock at par.

It’s reasonable to assume market interest rates at issuance were close to 5%. Preferred shares are typically issued at par with a dividend rate that reflects current interest rates. After issuance, the shares trade in the secondary market. The par value ($100) and dividend rate (5%) stay fixed. The market price can change.

If interest rates rise to 7%, the 5% preferred stock becomes less attractive. If the investor tries to sell at $100, finding a buyer may be difficult because investors can now buy newly issued investments paying closer to 7%. To attract buyers, the market price of the 5% preferred stock must fall. When the price of a fixed income investment falls, its yield rises.

An investor buys 100 shares of a newly issued 5%, $100 par preferred stock at par. Interest rates rise to 7% and the investor attempts to sell the stock for $70 per share. What is the current yield for the investment?

CY = annual income / market price CY = $5 / $70 CY = 7.14%

By lowering the price to $70, the yield rises to 7.14%, which is slightly above the 7% market rate. That higher yield makes the preferred stock more marketable. This is why fixed income market values tend to fall when interest rates rise.

When interest rates fall

An investor buys a newly issued 5%, $100 par preferred stock at par when interest rates are averaging 5%. A few years later, interest rates fall to 3%.

In this environment, the 5% preferred stock is more valuable. It pays $5 per year per share, while newly issued $100 par preferred stock might pay only $3 per year (3%). Because the 5% dividend is attractive, the investor can typically sell the shares for more than $100. That higher selling price creates a capital gain and increases the investor’s overall return.

An investor buys 100 shares of a newly issued 5%, $100 par preferred stock at par. Interest rates fall and the investor attempts to sell the security for $150 per share. What is the current yield?

Can you figure it out?

(spoiler) Answer = 3.33% CY = annual income / market price CY = $5 / $150 CY = 3.33%

When the price rises to $150, the yield falls. Even so, the yield is still above the current market interest rate of 3%, so the preferred stock remains marketable at that price. This is why market prices tend to rise when interest rates fall.

🔑 Market price changes directly affect preferred stock yields:

• Lower market price → higher yield
• Higher market price → lower yield

Yield is the measure that captures the preferred stock’s overall return based on what an investor pays.

Settlement

When an investor buys or sells shares of preferred stock, the settlement timeframe is the same as common stock.

Key points

Preferred stock characteristics

• Form of ownership (equity)
• Market prices are influenced by interest rates
• Considered a fixed income security

Preferred stock settlement

• Regular way: T+1
• Cash: same day if prior to 2:30pm ET

Preferred stock dividends

• Must be approved by the BOD
• Typically paid on a quarterly basis

Preferred stock par value

• Also known as face value
• Typically $100 for preferred stock
  • Could also be $25 or $50
• Never fluctuates
• Dividend rate based on par

Yield

• Represents overall rate of return
• Based on market price and dividend rate
• Continually fluctuates
• Yield and market price are inverses
  • Low market price = high yield
  • High market price = low yield

Current yield formula

• CY = annual income / market price

Fixed income market prices

• Discount = trading below par
• Premium = trading above par

Rising interest rates

• Fixed income market prices decline

Falling interest rates

• Fixed income market prices increase

Sources

Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.