Putnam
Preferred
Income
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
7-31-00
[SCALE LOGO OMITTED]
FROM THE TRUSTEES
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years during
which the global securities markets, the mutual fund industry, and
Putnam itself have experienced tremendous growth and change.
As we look to the future, we are certain that the changes will be
breathtaking in their scope. What will not change is the Trustees'
dedication to serving the best interests of our shareholders.
We welcome the challenges that lie ahead and are confident that Putnam
and your Board will continue to face those challenges successfully as
they have for more than 60 years. We look forward to helping you meet
your financial objectives for many years to come.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
September 20, 2000
REPORT FROM FUND MANAGEMENT
Jeanne L. Mockard
For the fiscal year ended July 31, 2000, Putnam Preferred Income Fund
maintained its long record of providing an attractive level of current
income, all of which qualifies for DRD (the dividends-received
deduction) status. However, it has been an extraordinarily difficult
year for fixed-income investors, as the Federal Reserve Board raised
interest rates several times while the stock market provided a rough
ride.
Preferred stocks are regarded as fixed-income securities and tend to
parallel the bond market, but they are also influenced by stock prices,
moving up or down in value with issuers' common shares. During the past
12 months, the value of the fund's shares proved to be less volatile
than either long-term bond or stock prices, while continuing to provide
steady income.
Total return for 12 months ended 7/31/00
Class A Class M
NAV POP NAV POP
----------------------------------
-2.20% -5.40% -2.35% -4.25%
----------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 6.
* FISCAL 2000 HAS BEEN VOLATILE YEAR FOR MARKETS
Ten consecutive years of growth for the U.S. economy should be a cause
for celebration, but the period has been a source of gradually mounting
concern among economists. Strong consumer confidence and low
unemployment are potential inflation factors, and these have led to the
Fed's decision to execute a series of interest-rate increases,
implemented throughout the past year, designed to slow the economy. But
until the closing few weeks of the fund's fiscal year, signs that the
Fed's efforts were taking effect failed to appear, causing market
observers to anxiously await monthly reports on employment, retail
sales, and other economic indicators.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Electric utilities 39.0%
Oil and gas 14.8%
Investment banking/
brokerage 14.4%
Banking 13.0%
Combined utilities 6.2%
Footnote reads:
*Based on net assets as of 7/31/00. Holdings will vary over time.
At the same time, leadership in the stock market began to rotate away
from high-tech companies that had been soaring to breath-taking highs.
By March, valuations of many high-growth issues reached such high levels
that there was a widespread retreat from this sector. Although each
plunge in the Nasdaq attracted some buyers back into the equity market,
seeking "hot stocks" at reduced prices, many others sought the relative
tranquility of the fixed-income markets. Year to date through July 31,
2000, 10-year U.S. Treasuries have outperformed the Dow Jones Industrial
Average and the S&P 500 Index for the first time since 1993.
Typically, high-quality bonds with shorter maturity dates offer a lower
yield than low-quality bonds and those with longer maturities. However,
this spring the U.S. Treasury launched a program to use budget surpluses
to buy back approximately $30 billion in long-term debt. As equity
investors took shelter in March, they put a sharp increase in demand
that coincided with diminished supply, triggering a bidding war. Yields
on long-term Treasuries fell while short-term rates reacted to the Fed's
tightening policies by rising. By the end of July, interest rates on
long-term Treasuries were lower than rates on lower quality short-term
debt. However, corporate bonds did not fare well as a result because
investors could put their money in safer short-term Treasury bonds.
* PREFERREDS REMAIN RELATIVELY TRANQUIL NICHE MARKET
Against this volatile backdrop, the relative stability of the preferred
markets seems especially attractive for qualified corporate investors.
Putnam Investments has an edge in the preferred market because of our
size and our access to extensive research. Preferred stocks trade in a
relatively small market and our analysts help us identify and capture
some of the best opportunities in a market that is far less liquid than
the stock or bond markets. What's more, when companies issue new
preferred stock or if substantial blocks of preferreds that meet our
quality standards come to the market, Putnam is often one of the first
firms to be notified.
"Putnam Investments has an edge in the preferred markets because of our
size and because of our access to extensive research."
-- Jeanne Mockard, portfolio manager, Putnam Preferred Income Fund
Putnam Preferred Income Fund invests in several types of preferred
stocks -- a strategy that has served shareholders well for the past
several years. Perpetual preferreds (which offer a fixed return with no
maturity date) continue to account for approximately three quarters of
the fund's total assets. Adjustable-rate preferreds (ARPs) and sinking
fund preferreds (sinkers) accounted for most of the rest of the fund's
investments as of the end of July 2000. Of these instruments, perpetuals
are the most sensitive to changes in interest rates because they have
the longest effective duration. Sinkers are next, in terms of interest
rate sensitivity, because they generally have a five-year call protected
period, after which the issuer can buy back (or sink) portions of the
issue over a predetermined time frame. ARPs offer the most price
stability because the rate they pay is adjusted as interest rates
change. However, ARPs that meet your fund's quality standards have
become increasingly hard to find in the past several years because
interest rates were low and most issuers opted for lower-cost methods of
financing.
* FUND'S PORTFOLIO HAS REMAINED RELATIVELY STABLE
Especially since suitable investment choices for this fund are not
plentiful, we are careful to replace securities well in advance of their
call dates in order to optimize cash flow and maintain our goal of
providing 100% DRD-qualified income for fund shareholders. Other than
purchasing new holdings to replace those that are called, few changes
have been made; the majority of portfolio holdings are highly coveted in
the marketplace.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
El Paso Tennessee Pipeline Co.
Series A, $4.125 cumulative preferred
Oil and gas
Merrill Lynch Co., Inc.
Series A, $2.25 depository shares
cumulative preferred
Investment banking/brokerage
Chase Manhattan Corp.
Series C, $2.71 cumulative preferred
Banking
Baltimore Gas & Electric Co.
Series 93, $7.125 cumulative preferred
Combined utilities
Peco Energy Co.
$7.48 cumulative preferred
Electric utilities
FPL Group
Series U, $6.75 cumulative preferred
Electric utilities
Alabama Power Co.
$1.30 cumulative preferred
Electric utilities
Anadarko Petroleum Corp.
$5.46 depository shares preferred
Oil and gas
J.P. Morgan & Co., Inc.
Series H, $3.31 cumulative preferred
Banking
Rochester Gas and Electric
Series V, sinking fund $6.60
cumulative preferred
Electric utilities
Footnote reads:
These holdings represent 42.9% of the fund's net assets as of
7/31/00.Portfolio holdings will vary over time.
The fund's industry focus remains on utilities partly because they are
the primary issuers of preferred stocks and partly because so many
utilities companies are benefiting from deregulation. We are confident
that the issues in the portfolio combine the financial strength needed
to secure payment obligations on preferreds and other debt instruments
with equity appeal for conservative investors.
Three of the fund's current holdings -- Anadarko Petroleum Corp.,
Entergy Mississippi, Inc., and FPL Group -- are good examples of the
situations we like. Owners of Anadarko common shares recently approved a
merger with Union Pacific Resources Group, which would make the combined
company one of the largest and financially strongest independent oil and
gas companies in the world. The new Anadarko has exploration and
production operations in the United States, the Gulf of Mexico, and
Alaska, as well as in Canada and overseas. The combined companies stand
to benefit from high energy prices and substantial cash flow that they
plan to use to accelerate growth. The fund owns Anadarko perpetual
preferreds.
Entergy Mississippi, Inc. and FPL Group recently announced plans for a
$27 billion merger of two equals, which would create the nation's
largest power company. The fund owns preferreds issued by both
companies. Florida-based FPL is one of the largest providers of
electricity-related services in the United States, and the holding
company for Florida Power & Light. Entergy, headquartered in New
Orleans, is a major global energy company engaged in power production,
distribution, and related services. The combined company will be a
premier national nuclear company and expects to benefit from one of the
largest energy marketing and trading operations in the country.
* SENTIMENT MAY SHIFT IN FAVOR OF FIXED-INCOME INVESTORS
As the new fiscal year gets under way, investor sentiment appears to be
shifting from one of concern about rising interest rates to one of
relief that the threat of inflation is diminishing. We believe that the
Fed will be successful in engineering a soft landing for the economy
through its tight monetary policy. However, the slower economic growth
that will probably result from higher interest rates could impact
corporate profits and adversely affect the bond market.
Over the longer term, we believe a slower economy should produce
declining interest rates, which would be favorable for both the stock
and bond markets. No matter what the outcome, shareholders of Putnam
Preferred Income Fund should continue to benefit from its solid track
record of active management in a relatively obscure market.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 7/31/00, there is no guarantee the fund will
continue to hold these securities in the future.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Preferred Income Fund seeks a high level of income that qualifies for
the 70% corporate dividends-received deduction for federal income-tax
purposes. The dividends-received deduction is not available to
non-corporate investors.
TOTAL RETURN FOR PERIODS ENDED 7/31/00
Class A Class M
(inception dates) (1/4/84) (4/20/95)
NAV POP NAV POP
--------------------------------------------------------------
1 year -2.20% -5.40% -2.35% -4.25%
--------------------------------------------------------------
5 years 30.26 26.05 28.38 25.84
Annual average 5.43 4.74 5.12 4.70
--------------------------------------------------------------
10 years 111.36 104.48 104.99 100.89
Annual average 7.77 7.42 7.44 7.23
--------------------------------------------------------------
Annual average
(life of fund) 7.50 7.29 7.20 7.07
--------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/00
Merrill Lynch
Perpetual Standard &
Preferred Poor's Consumer
Index 500 Index price index
------------------------------------------------------------
1 year -0.89% 8.97% 3.60%
------------------------------------------------------------
5 years 32.29 177.11 13.10
Annual average 5.75 22.60 2.49
------------------------------------------------------------
10 years 126.69 408.18 32.44
Annual average 8.53 17.65 2.85
------------------------------------------------------------
Annual average
(life of fund) --* 17.26 3.27
------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 3.25% and
2.00%, respectively. Returns for class M shares for periods prior to
their inception are derived from the historical performance of class A
shares, adjusted to reflect both the initial sales charge currently
applicable to class M shares and the higher operating expenses
applicable to such shares. All returns assume reinvestment of
distributions at NAV. Investment return and principal value will
fluctuate so that an investor's shares when redeemed may be worth more
or less than their original cost.
*The Merrill Lynch Perpetual Preferred Index was introduced on 2/28/89.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 7/31/90
Fund's class A S&P 500 Consumer price
Date shares at POP Index index
7/31/90 9,425 10,000 10,000
7/31/91 11,026 11,276 10,445
7/31/92 12,873 12,718 10,775
7/31/93 14,433 13,829 11,074
7/31/94 14,522 14,542 11,380
7/31/95 15,697 18,339 11,710
7/31/96 16,833 21,377 12,055
7/31/97 19,240 32,523 12,316
7/31/98 20,870 38,795 12,523
7/31/99 20,909 46,633 12,784
7/31/00 $20,448 $50,818 $13,244
Footnote reads:
Past performance is no assurance of future results. At the end of the
same time period, a $10,000 investment in the fund's class M shares
would have been valued at $20,499 ($20,089 at public offering price).
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 7/31/00
Class A Class M
---------------------------------------------------------------------
Distributions (number) 12 12
---------------------------------------------------------------------
Income $0.501642 $0.481279
---------------------------------------------------------------------
Capital gains -- --
---------------------------------------------------------------------
Return of capital1 0.024000 0.023000
---------------------------------------------------------------------
Total $0.525642 $0.504279
---------------------------------------------------------------------
Share value: NAV POP NAV POP
---------------------------------------------------------------------
7/31/99 $8.59 $8.88 $8.56 $8.73
---------------------------------------------------------------------
7/31/00 7.88 8.14 7.86 8.02
---------------------------------------------------------------------
Current return (end of period)
---------------------------------------------------------------------
Current dividend rate2 6.04% 5.85% 5.80% 5.69%
---------------------------------------------------------------------
Taxable equivalent4 8.32 8.05 7.99 7.83
---------------------------------------------------------------------
Current 30-day SEC yield3 6.66 6.34 6.41 6.20
---------------------------------------------------------------------
Taxable equivalent4 9.17 8.73 8.83 8.54
---------------------------------------------------------------------
1 See page 24 for more information.
2 Most recent distribution, annualized and divided by NAV or POP at end
of period.
3 Based only on investment income, calculated using SEC guidelines.
4 The taxable equivalent examples in this table show the return that a
corporation taxed at the 35% Federal corporate tax rate would have to
earn from a non tax-advantaged investment to produce an after-tax return
equal to that of the fund's, assuming 100% of distributions qualify for
the dividend-received deduction.
TOTAL RETURN FOR PERIODS ENDED 6/30/00 (most recent calendar quarter)
Class A Class M
(inception dates) (1/4/84) (4/20/95)
NAV POP NAV POP
----------------------------------------------
1 year -2.39% -5.58% -2.66% -4.66%
----------------------------------------------
5 years 30.17 25.97 28.44 25.89
Annual average 5.41 4.73 5.13 4.71
----------------------------------------------
10 years 108.75 101.96 102.43 98.40
Annual average 7.64 7.28 7.31 7.09
----------------------------------------------
Annual average
(life of fund) 7.51 7.30 7.21 7.08
----------------------------------------------
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 3.25% maximum sales charge for class A
shares and 2.00% for class M shares.
COMPARATIVE BENCHMARKS
Merrill Lynch Perpetual Preferred Index* is an unmanaged list of
perpetual preferred stocks that is commonly used as a general measure of
performance for the preferred-stock market.
Standard & Poor's 500 Index* is an unmanaged list of common stocks that
is frequently used as a general measure of stock market performance.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities
in the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss
for the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that
remain in the portfolio -- any change in unrealized gains or losses over
the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal year ended July 31, 2000
To the Trustees and Shareholders of
Putnam Preferred Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam
Preferred Income Fund (the "fund") at July 31, 2000, and the results of
its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with accounting
principles generally accepted in the United States. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the fund's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at July 31, 2000 by correspondence
with the custodian, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 6, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
July 31, 2000
PREFERRED STOCKS (97.5%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Automotive (1.8%)
-------------------------------------------------------------------------------------------------------------------
60,600 Ford Motor Co. Ser. B, $2.063, dep. shs.
cumulative preferred (cum. pfd.) $ 1,560,450
Banking (13.0%)
-------------------------------------------------------------------------------------------------------------------
185,400 Chase Manhattan Corp. Ser. C, $2.71, cum. pfd. 4,797,225
50,000 FleetBoston Financial Corp. Ser. V, $1.812, cum. pfd. 1,231,250
15,000 Indosuez Holdings ADS 144A $2.594, pfd. (Mexico) 382,500
54,700 Morgan (J.P.) & Co., Inc. Ser. H, $3.31, cum. pfd. 2,639,275
33,259 Morgan (J.P.) & Co., Inc. Ser. A, $1.00, cum. pfd. 2,448,694
----------------
11,498,944
Combined Utilities (6.2%)
-------------------------------------------------------------------------------------------------------------------
40,000 Baltimore Gas & Electric Co. Ser. 93, $7.125, cum. pfd. 4,065,000
15,000 Baltimore Gas & Electric Co. Ser. 95, $6.99, cum. pfd. 1,477,500
----------------
5,542,500
Consumer Finance (2.2%)
-------------------------------------------------------------------------------------------------------------------
64,250 Household International, Inc. Ser. 92-A, $2.06,
cum. pfd. 1,630,344
14,200 MBNA Corp. Ser. A, $1.875, cum. pfd. 337,250
----------------
1,967,594
Electric Utilities (39.0%)
-------------------------------------------------------------------------------------------------------------------
156,100 Alabama Power Co. $1.30, cum. pfd. 3,082,975
5,000 Atlantic City Electric Co. Sinking Fund, $7.80,
cum. pfd. 510,000
2,500 Avista Corp. Ser. K, Sinking Fund $6.95, pfd. 252,188
7,102 Central Maine Power Co. Ser. A, Sinking Fund
$7.999, cum. pfd. 710,200
5,416 Duke Energy Corp. Ser. Y, $7.04, cum. pfd. 555,817
6,429 Duke Energy Corp. Ser. W, $7.00, cum. pfd. 654,954
2,900 Entergy Mississippi, Inc. $4.92, cum. pfd. 237,800
18,021 FPL Group Ser. S, $6.98, cum. pfd. 1,817,868
31,200 FPL Group Ser. U, $6.75, cum. pfd. 3,147,300
14,000 Indianapolis Power & Light $5.65, cum. pfd. 1,260,000
7,000 Kentucky Utilities Corp. $6.53, cum. pfd. 679,000
3,000 Monongahela Power Co. Ser. L, $7.73, cum. pfd. 303,750
36,800 Niagara Mohawk Power Corp. Ser. A, $1.625, cum.
Adjustable Rate Preferred (ARP) 855,600
40,000 Niagara Mohawk Power Corp. Ser. C, $1.75,
cum. ARP 940,000
49,000 Northern Indiana Public Services Ser. A, $3.00,
cum. ARP 2,211,125
88,000 Pacific Gas & Electric Co. $1.76, cum. pfd. 2,178,000
16,000 PacifiCorp Sinking Fund $7.48, cum. pfd. 1,612,800
30,000 Peco Energy Co. $7.48, cum. pfd. 3,213,750
6,000 Potomac Electric Power Co. Ser 92, Sinking Fund
$1.70, cum. pfd. 303,000
10,000 PP&L, Inc. Sinking Fund $6.125, cum. pfd. 941,250
11,750 Public Service Electric & Gas $6.92, cum. pfd. 1,163,250
5,000 Public Service Electric & Gas Ser. E, $5.28, cum. pfd. 375,000
30,700 Puget Sound Energy, Inc. Ser. II, $1.86, cum. pfd. 752,150
26,250 Rochester Gas and Electric Ser. V, Sinking Fund
$6.60, cum. pfd. 2,533,125
55,100 TXU Electric Co. Ser. A, $0.47, dep. shs. cum. pfd. 1,274,188
45,800 TXU Electric Co. Ser. B, $0.45, dep. shs. cum. pfd. 1,019,050
18,700 Virginia Electric & Power Co. $7.05, cum. pfd. 1,888,700
1,000 Virginia Electric & Power Co. $6.98, cum. pfd. 100,875
----------------
34,573,715
Financial (1.9%)
-------------------------------------------------------------------------------------------------------------------
37,500 SLM Holding Corp. $3.48, pfd. 1,715,625
Investment Banking/Brokerage (14.4%)
-------------------------------------------------------------------------------------------------------------------
39,500 Bear Stearns Companies, Inc. (The) Ser. E, $3.075,
cum. pfd. 1,633,523
30,000 Bear Stearns Companies, Inc. (The) Ser. F, $2.865,
cum. pfd. 1,092,450
8,400 Bear Stearns Companies, Inc. (The) Ser. A, $2.75,
cum. ARP 369,600
32,600 Bear Stearns Companies, Inc. (The) Ser. G, $2.75,
cum. pfd. 1,189,900
20,000 Lehman Brothers Holdings, Inc. Ser. C, $2.97, pfd. 795,000
41,500 Lehman Brothers Holdings, Inc. Ser. D, $2.835,
dep. shs. pfd. 1,582,188
200,437 Merrill Lynch Co., Inc. Ser. A, $2.25, dep. shs. cum. pfd. 5,587,181
10,450 Morgan Stanley $3.875, dep. shs. cum. pfd. 484,618
----------------
12,734,460
Metals (0.7%)
-------------------------------------------------------------------------------------------------------------------
11,050 Alcoa, Inc. $3.75, cum. pfd. 618,800
Natural Gas Utilities (0.9%)
-------------------------------------------------------------------------------------------------------------------
7,200 UGI Utilities Sinking Fund $7.75, cum. pfd. 789,300
Oil & Gas (14.8%)
-------------------------------------------------------------------------------------------------------------------
41,000 Anadarko Petroleum Corp. $5.46, dep. shs. pfd. 3,028,875
10,000 Apache Corp. Ser. B, $5.68, cum. pfd. 770,000
20,000 Devon Energy Corp. Ser. A, $6.49, cum. pfd. 1,840,000
116,500 El Paso Tennessee Pipeline Co. Ser. A, $4.125, cum. pfd. 5,941,500
15,000 Enron Corp. $7.75, cum. pfd. 1,595,625
----------------
13,176,000
Shipping (2.6%)
-------------------------------------------------------------------------------------------------------------------
99,373 Amerco, Inc. Ser. A, $2.125, cum. pfd. 2,310,422
----------------
Total Preferred Stocks (cost $96,379,528) $ 86,487,810
SHORT-TERM INVESTMENTS (2.2%) (a) (cost $1,977,000)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$1,977,000 Interest in $600,000,000 joint repurchase agreement
dated July 31, 2000 with S.B.C. Warburg, Inc. due
August 1, 2000 with respect to various U.S. Treasury
obligations -- maturity value of $1,977,362 for an
effective yield of 6.59% $ 1,977,000
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $98,356,528) (b) $ 88,464,810
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $88,697,953.
(b) The aggregate identified cost on a tax basis is $98,357,520,
resulting in gross unrealized appreciation and depreciation of $793,623
and $10,686,333, respectively, or net unrealized depreciation of
$9,892,710.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
ADS after the name of a foreign holding stands for American
Depositary Shares representing ownership of foreign
securities on deposit with a domestic custodian bank.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $98,356,528) (Note 1) $ 88,464,810
-------------------------------------------------------------------------------------------
Cash 90
-------------------------------------------------------------------------------------------
Dividends, interest and other receivables 192,632
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 464,397
-------------------------------------------------------------------------------------------
Total assets 89,121,929
Liabilities
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 174,414
-------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 41,776
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 147,168
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 10,609
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 13,786
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,380
-------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,322
-------------------------------------------------------------------------------------------
Other accrued expenses 33,521
-------------------------------------------------------------------------------------------
Total liabilities 423,976
-------------------------------------------------------------------------------------------
Net assets $ 88,697,953
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $102,855,979
-------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (174,414)
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (4,091,894)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (9,891,718)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $ 88,697,953
-------------------------------------------------------------------------------------------
Computation of net asset value and offering price
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($82,559,378 divided by 10,481,777 shares) $7.88
-------------------------------------------------------------------------------------------
Offering price per class A share (100/96.75 of $7.88)* $8.14
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($6,138,575 divided by 781,272 shares) $7.86
-------------------------------------------------------------------------------------------
Offering price per class M share (100/98.00 of $7.86)* $8.02
-------------------------------------------------------------------------------------------
* On single retail sales of less than $100,000. On sales of $100,000
or more and group sales, the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year ended July 31, 2000
<S> <C>
Investment income:
-------------------------------------------------------------------------------------------
Dividends $ 7,386,916
-------------------------------------------------------------------------------------------
Interest 43,559
-------------------------------------------------------------------------------------------
Total investment income 7,430,475
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 687,502
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 109,861
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 16,322
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 9,025
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 23,019
-------------------------------------------------------------------------------------------
Other 53,038
-------------------------------------------------------------------------------------------
Total expenses 898,767
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (24,691)
-------------------------------------------------------------------------------------------
Net expenses 874,076
-------------------------------------------------------------------------------------------
Net investment income 6,556,399
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (1,966,853)
-------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (4,756)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the year (6,914,178)
-------------------------------------------------------------------------------------------
Net loss on investments (8,885,787)
-------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(2,329,388)
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended July 31
---------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $6,556,399 $7,734,975
--------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (1,971,609) 373,548
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (6,914,178) (8,046,069)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (2,329,388) 62,454
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (6,005,718) (7,107,667)
--------------------------------------------------------------------------------------------------
Class M (542,516) (683,686)
--------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- (650,386)
--------------------------------------------------------------------------------------------------
Class M -- (62,561)
--------------------------------------------------------------------------------------------------
From return of capital
Class A (287,132) (36,261)
--------------------------------------------------------------------------------------------------
Class M (25,938) (3,488)
--------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (22,559,893) (7,803,543)
--------------------------------------------------------------------------------------------------
Total decrease in net assets (31,750,585) (16,285,138)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 120,448,538 136,733,676
--------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $174,414, and
$182,579, respectively) $88,697,953 $120,448,538
--------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS A
-------------------------------------------------------------------------------------------------------------
Eight months
Per-share ended
operating performance Year ended July 31 July 31+ Year ended November 30
-------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.59 $9.16 $9.00 $8.71 $8.59 $7.88
-------------------------------------------------------------------------------------------------------------
Investment operations
-------------------------------------------------------------------------------------------------------------
Net investment income .50 .53 .38 .56 .58 .57
-------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.68) (.51) .16 .30 .12 .73
-------------------------------------------------------------------------------------------------------------
Total from
investment operations (.18) .02 .54 .86 .70 1.30
-------------------------------------------------------------------------------------------------------------
Less distributions:
-------------------------------------------------------------------------------------------------------------
From net
investment income (.51) (.54) (.38) (.57) (.58) (.59)
-------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.05) -- -- --(c) --
-------------------------------------------------------------------------------------------------------------
From return
of capital (.02) --(c) -- -- -- --
-------------------------------------------------------------------------------------------------------------
Total distributions (.53) (.59) (.38) (.57) (.58) (.59)
-------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.88 $8.59 $9.16 $9.00 $8.71 $8.59
-------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
-------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (2.20) 0.19 6.04* 10.22 8.61 17.05
-------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $82,559 $109,932 $124,784 $116,413 $117,502 $120,591
-------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .83 .88 .59* .85 .89 .90
-------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.23 5.90 4.13* 6.34 6.90 6.91
-------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.02 30.09 33.51* 20.46 29.51 34.76
-------------------------------------------------------------------------------------------------------------
+ The fiscal year end was advanced from November 30 to July 31.
++ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Distributions in excess of net investment income and return of
capital amounted to less than $0.01 per share for each class.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
-------------------------------------------------------------------------------------------------------------------
Eight months For the period
Per-share ended Apr. 20, 1995++
operating performance Year ended July 31 July 31+ Year ended November 30 to Nov. 30
-------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.56 $9.13 $8.97 $8.69 $8.58 $8.12
-------------------------------------------------------------------------------------------------------------------
Investment operations
-------------------------------------------------------------------------------------------------------------------
Net investment income .47 .50 .37 .54 .56 .33
-------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.67) (.51) .15 .29 .11 .46
-------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.20) (.01) .52 .83 .67 .79
-------------------------------------------------------------------------------------------------------------------
Less distributions:
-------------------------------------------------------------------------------------------------------------------
From net
investment income (.48) (.51) (.36) (.55) (.56) (.33)
-------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.05) -- -- --(c) --
-------------------------------------------------------------------------------------------------------------------
From return
of capital (.02) --(c) -- -- -- --
-------------------------------------------------------------------------------------------------------------------
Total distributions (.50) (.56) (.36) (.55) (.56) (.33)
-------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $7.86 $8.56 $9.13 $8.97 $8.69 $8.58
-------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
-------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (2.35) (0.07) 5.89* 9.85 8.22 9.88*
-------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $6,139 $10,516 $11,950 $7,477 $5,333 $729
-------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.08 1.13 .76* 1.10 1.14 .67*
-------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.97 5.60 3.88* 6.01 6.41 3.73*
-------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.02 30.09 33.51* 20.46 29.51 34.76
-------------------------------------------------------------------------------------------------------------------
+ The fiscal year end was advanced from November 30 to July 31.
++ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Distributions in excess of net investment income and return of
capital amounted to less than $0.01 per share for each class.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
July 31, 2000
Note 1
Significant accounting policies
Putnam Preferred Income Fund (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks a high level of income
that qualifies for the 70% corporate dividends-received deduction, with
minimum fluctuations in principal.
The fund offers both class A and class M shares. Class A shares are sold
with a maximum front-end sales charge of 3.25%. Class M shares are sold
with a maximum front-end sales charge of 2.00% and pay an ongoing
distribution fee.
Expenses of the fund are borne pro-rata by the holders of both classes
of shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sales price on its principal exchange, or if no sales
are reported -- as in the case of some securities traded
over-the-counter -- the last reported bid price. Preferred stocks, for
which reliable market quotations are not readily available, are stated
at fair value on the basis of valuations furnished by pricing services,
or dealers approved by the Trustees, which determine valuation for
normal, institutional-sized trading units of such securities using
methods based on market transactions for comparable securities and
various relationships between securities that are generally recognized
by institutional traders. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Collateral for certain tri-party repurchase agreements is held at the
counterparty's custodian in a segregated account for the benefit of the
fund and the counterparty. Putnam Management is responsible for
determining that the value of these underlying securities is at all
times at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Gains or losses on securities sold are determined
on the identified cost basis.
Interest income is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date except that certain dividends from
foreign securities are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends, if any, are recorded at the fair
market value of the securities received.
E) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed. Realized gains and losses on purchased options are included in
realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
F) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
July 31, 2000, the fund had no borrowings against the line of credit.
G) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
At July 31, 2000, the fund had a capital loss carryover of approximately
$2,443,000 available to offset future capital gains, if any. The amount
of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- ------------------
$208,000 July 31, 2002
1,533,000 July 31, 2003
702,000 July 31, 2008
H) Distributions to shareholders The fund declares a distribution each
day based upon the projected net investment income, for a specified
period, calculated as if earned pro-rata throughout the period on a
daily basis. Such distributions are recorded daily and paid monthly.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid at least annually. The amount and character of income and gains
to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. These differences include temporary and permanent
differences of losses on wash sale transactions, post-October loss
deferrals and dividends payable. Reclassifications are made to the
fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations. For the year ended July 31, 2000, the fund required no such
reclassifications.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.65% of the
first $500 million of average net assets, 0.55% of the next $500
million, 0.50% of the next $500 million, 0.45% of the next $5 billion,
0.425% of the next $5 billion, 0.405% of the next $5 billion, 0.39% of
the next $5 billion, and 0.38% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor
Services, a division of PFTC.
For the year ended July 31, 2000, fund expenses were reduced by $24,691
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $1,500
has been allocated to the fund, and an additional fee for each Trustees
meeting attended. Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Compensation of Trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
The fund has adopted a distribution plan (the "Plan") with respect to
its class M shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940. The purpose of the Plan is to compensate Putnam Retail
Management, Inc., a wholly-owned subsidiary of Putnam Investments, Inc.,
for services provided and expenses incurred by it in distributing class
M shares of the fund. The Plan provides for payment by the fund to
Putnam Retail Management, Inc. at an annual rate of up to 1.00% of the
average net assets attributable to class M shares. The Trustees have
approved payment by the fund to an annual rate of 0.25% of the average
net assets attributable to class M shares.
For the year ended July 31, 2000, Putnam Retail Management, Inc., acting
as underwriter received net commissions of $9,842 and $7,063 from the
sale of class A and class M shares, respectively. A deferred sales
charge of up to 1% is assessed on certain redemptions of class A shares.
For the year ended July 31, 2000, Putnam Retail Management, Inc., acting
as underwriter received $8,889 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 2000, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $11,543,945 and $35,929,308, respectively. There were no
purchases and sales of U.S. government obligations.
Note 4
Capital shares
At July 31, 2000, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended July 31, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 1,900,041 $ 15,768,272
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 484,583 3,980,674
---------------------------------------------------------------------------
2,384,624 19,748,946
Shares
repurchased (4,707,167) (38,745,132)
---------------------------------------------------------------------------
Net decrease (2,322,543) $(18,996,186)
---------------------------------------------------------------------------
Year ended July 31, 1999
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 3,069,307 $27,301,650
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 589,123 5,222,099
---------------------------------------------------------------------------
3,658,430 32,523,749
Shares
repurchased (4,481,328) (39,663,072)
---------------------------------------------------------------------------
Net decrease (822,898) $(7,139,323)
---------------------------------------------------------------------------
Year ended July 31, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 285,892 $ 2,398,520
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 51,845 424,625
---------------------------------------------------------------------------
337,737 2,823,145
Shares
repurchased (784,891) (6,386,852)
---------------------------------------------------------------------------
Net decrease (447,154) $(3,563,707)
---------------------------------------------------------------------------
Year ended July 31, 1999
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 520,897 $4,605,090
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 66,455 587,010
---------------------------------------------------------------------------
587,352 5,192,100
Shares
repurchased (667,458) (5,856,320)
---------------------------------------------------------------------------
Net decrease (80,106) $ (664,220)
---------------------------------------------------------------------------
FEDERAL TAX INFORMATION
(Unaudited)
The fund has designated 100% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
For the year ended 2000, a portion of the Fund's distribution represents
a return of capital and is therefore not taxable to shareholders.
The Form 1099 you receive in January 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
FUND INFORMATION
WEB SITE
www.putnaminvestments.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Thomas V. Reilly
Vice President
Deborah F. Kuenstner
Vice President
Jeanne L. Mockard
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
This report is for the information of shareholders of Putnam Preferred
Income Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary, and
Putnam Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site:
www.putnaminvestments.com.
Not FDIC Insured, May Lose Value, No Bank Guarantee
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
---------------------
PRST STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
AN037-63668 029/295/867 9/00