What is the Cost of Preferred Stock?

The cost of preferred stock is the stated dividend amount paid annually on each share of preferred stock, divided by the current market price of the stock. These dividends are not tax deductible, so the cost of preferred stock is always higher than the cost of debt – for which interest payments are tax deductible. The cost of preferred stock is usually less than the cost of common stock, for which investors demand an even higher return on investment.

A business should always know the cost of its preferred stock, since it is one of the three components of its cost of capital. The other two components are the cost of its debt and the cost of its equity.