How to Calculate the Return on Initial Investment of Preferred Stock

Dividends on preferred stock add to your return on initial investment.

Dividends on preferred stock add to your return on initial investment.

Preferred stock is an investment known for steady, fixed dividend payments rather than the large price swings that sometimes occur with common stock. When you own preferred stock, it’s important to calculate your return on initial investment to see how its performance measures up to your expectations. This return represents the total money you earn from the stock as a percentage of the amount you paid for it. It excludes any returns from extra shares you buy after your initial purchase, such as shares you pick up by reinvesting dividends.

Multiply the price you paid per share of preferred stock by the number of shares you bought. For example, assume you bought 50 shares of preferred stock for $25.50 per share. Multiply 50 by $25.50 to get $1,275.

Add any commissions or brokerage fees you paid to your Step 1 result to figure your total initial investment. In this example, assume you paid $10 in commission. Add $10 to $1,275 to get $1,285.

Visit any financial website that provides stock information. Type the preferred stock’s ticker symbol of capital letters into the stock quote text box. Click “Get Quote,” and identify the stock’s current market price. If you already sold the stock, use the price you sold it for instead. In this example, assume you still own the stock, and its current price is $26.75.

Multiply the current price by the number of shares you initially purchased. In this example, multiply $26.75 by 50 to get $1,337.50.

Subtract your initial investment from your Step 4 result. If you already sold the stock, also subtract any sales commissions you paid. In this example, subtract $1,285 from $1,337.50 to get $52.50.

Multiply the dividends you received per share by the number of shares you initially bought. Add this result to your Step 5 result. In this example, assume you’ve received $3 in dividends per share since you’ve owned the stock. Multiply $3 by 50 to get $150. Add $150 and $52.50 to get $202.50.

Divide your Step 6 result by your Step 2 result and multiply this result by 100 to calculate your return on initial investment as a percentage. The higher the percentage, the better. A negative percentage means you lost money on the investment. Concluding the example, divide $202.50 by $1,285 to get 0.158. Multiply 0.158 by 100 to get a 15.8-percent return on initial investment.

Tip

  • Compare the return on initial investment of different preferred stocks you own to determine which is the better investment. But keep in mind that the return-on-initial-investment calculation overlooks the length of time you’ve owned a preferred stock, which can affect your analysis. For example, assume you’ve owned a preferred stock for six months and another for a year, and each has earned a 10-percent return on investment. The six-month stock has performance better because it’s taken less time to generate the same return as the other.
 

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