How to Value Preferred Stocks

Preferred stocks are a hybrid between bonds and stocks: they offer guaranteed fixed dividends and priority in case of liquidation, but without voting rights.

The basic formula is simple:

Value = Annual Dividend ÷ Required Rate of Return

Practical example: If a stock pays $6 annually and your required return is 8%, the fair value is $75 per share ($6 ÷ 0.08).

• If it quotes at $72 → buying opportunity (return > 8%)
• If it quotes at $78 → overvalued (return < 8%)

What you should also consider:

Preferred shares can be redeemable (the company buys them back at a fixed price), so the return could be limited. Also, be careful with changes in interest rates: if they rise, the value decreases.

Versus common stocks: preferred = stable income; common = more growth potential but no guarantees. Choose based on whether you seek cash flow or appreciation.

In summary: the valuation of preferred shares is more predictable than other assets, ideal for conservative portfolios that require regular income.