Preferred Stock Investing Rate Of Return

The par value and rate of return are usually specified in the articles, but they may be amended under certain conditions. Sometimes there is a provision which protects against dilution by requiring that no additional preferred may be issued without the consent of the holders of at least two-thirds of the outstanding shares.

We will now turn our attention to the various features of preferred stocks. First and foremost is the matter of the par value of each share. While $100 is fairly common, some corporations, such as industrial and utility, have felt that the investor of modest means would prefer something more nearly within his reach, so that values of $50, $25, and $20 have become more common; in a few cases we may find $10, $5, and even $1 par values. Sometimes there may be a preferred issue which has no stated par value, but the return is definitely stated so that an assumed par value may easily be calculated. The market price will be in the neighborhood of this assumed value, depending upon the existing money rates and general business conditions.

The rate of return is based largely upon the projected earnings and also upon prevailing money rates. For example, during the Great Depression of the thirties, when money was scarce, it was quite common to issue 6 per cent and even 7 per cent preferred stocks. In recent years, when money has been more plentiful, many is sues have had 4 per cent, 42 per cent, and 5 per cent rates.

Notwithstanding the stated rate of return, as in the case of bonds, the market price may cause the actual rate of return to be more or less than the stated rate; in other words, a preferred stock may sell at a premium or at a discount, depending upon the value placed upon it by the market place.

However, there is one practical limitation placed upon such a price. In the case of an issue subject to call, that is, one that may be redeemed in whole or in part at the discretion of the directors, the call price may set an actual ceiling price on the stock, because no investor will be eager to buy a stock for more than the price at which it may be redeemed. This call feature is of no real value to the investor unless he has protected himself by buying the stock for something under the call price.