<PAGE> 1
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
During the six months ended April 30, 1995, the first half of the fiscal year
for Vanguard Preferred Stock Fund, both the stock market and the bond market
surged ahead, as interest rates headed sharply lower. This environment provided
a strong boost to preferred stocks and brought the Fund's six-month return to
an impressive +11.2%.
The table below presents the total return (capital change plus income)
of Vanguard Preferred Stock Fund for the six-month period compared to the
results of the unmanaged Merrill Lynch Perpetual Preferred Index, a broad
measure of the preferred stock market comprising more than 247 securities and
having a total market value of nearly $32 billion.
<TABLE>
<CAPTION>
- --------------------------------------------------------
Total Return
----------------
Six Months Ended
April 30, 1995
- --------------------------------------------------------
<S> <C>
VANGUARD PREFERRED STOCK FUND +11.2%
- --------------------------------------------------------
MERRILL LYNCH PERPETUAL PREFERRED INDEX + 9.8%
- --------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $8.35 per share on
October 31, 1994, and $8.93 on April 30, 1995, with the latter figure adjusted
to take into account the reinvestment of our dividend payments totaling $.33
per share from net investment income over the past six months. Based on the net
asset value on April 30, 1995, the Fund's current yield is 7.5%.
We are pleased to report that 100% of the Fund's net investment income
qualified for the intercorporate dividends received deduction, which exempts
corporations from paying taxes on 70% of the income derived from preferred
stocks. Because of this tax advantage, the corporate investor would need to
earn a 10.3% pre-tax yield in a bond fund to match the 7.5% pre-tax yield
provided by the Fund (assuming the maximum marginal tax rate of 35%).
SIX-MONTH OVERVIEW
As the fiscal year commenced, a precipitous decline in the general level of
interest rates helped to reverse the fortunes of stock and bond investors, as
lower yields resulted in substantial gains in both the stock and bond markets.
The Fund's interest-rate-sensitive holdings posted impressive gains; in all, we
outpaced our unmanaged comparative benchmark by +1.4 percentage points for the
six-month period.
In the wake of repeated interest rate increases by the Federal Reserve
during 1994, the long-term U.S. Treasury bond yield peaked in November at 8.2%.
Since then, the impact of the cumulative rate hikes has raised concerns about
dampening future economic growth, as the increased cost of borrowing filters
through the economy. However, a 90-basis-point drop in interest rates, to 7.3%
at the end of April, has engendered significant increases in bond prices and
revived hopes of a successfully navigated "soft landing."
While we are quite pleased with the absolute return of +11.2% achieved
by the Fund over this admittedly brief time frame, we are especially pleased
that our return was more than double the +5.3% return achieved by the average
fixed-income mutual fund. As you know, this benchmark, which includes
high-grade, low-grade, long-term, and short-term funds, is hardly a perfect
measure. In particular, the fixed-income fund average exhibits less price
sensitivity than preferreds. As I have noted in the past, the longer maturity
of the Fund results in a "principal reward" when rates fall, while creating a
"principal penalty" when rates rise. This inherent price volatility more or
less comes with the territory when investing in preferred stocks.
IN SUMMARY
Despite the volatility created by the interest rate swings over the past two
years, Vanguard Preferred Stock Fund investors who have held onto their shares
for the full period have been rewarded with generous returns. Our goal in the
months ahead remains the
1
<PAGE> 2
same: to offer a high-quality, diversified portfolio of preferred stocks that
qualifies all of its income for the 70% intercorporate dividends received
deduction.
I look forward to reporting to you on our results for the full year in
our 1995 Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board May 17, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SUMMARY RESULTS
<S> <C>
$100,000 INVESTMENT ON DECEMBER 3, 1975 (10,000 SHARES)
- -------------------------------------------------------------------------------------------------------------------
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TAKEN IN CASH
Dividends from Net Investment Income $153,700
Distributions from Net Realized Capital Gains $ 9,000
Net Asset Value April 30, 1995 (10,000 shares) $ 89,300
- -------------------------------------------------------------------------------------------------------------------
INCOME DIVIDENDS TAKEN IN CASH, CAPITAL GAINS DISTRIBUTIONS ACCEPTED IN ADDITIONAL SHARES
Dividends from Net Investment Income $163,588
Net Asset Value April 30, 1995 (10,970 shares) $ 97,961
- -------------------------------------------------------------------------------------------------------------------
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS ACCEPTED IN ADDITIONAL SHARES
Net Asset Value April 30, 1995 (68,800 shares) $614,385
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS--THE CURRENT YIELD QUOTED IN THE CHAIRMAN'S LETTER
IS CALCULATED IN ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL
RETURNS FOR THE FUND (PERIODS ENDED MARCH 31, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
--------------------------------
INCEPTION TOTAL INCOME CAPITAL
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD PREFERRED STOCK FUND 12/3/75 +4.29% +10.09% +10.99% +9.11% +1.88%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
2
<PAGE> 3
REPORT FROM THE INVESTMENT ADVISER
SIX MONTHS IN REVIEW
Long-term interest rates peaked in November 1994, nearly one year after
reaching a cyclical trough. Rates on thirty-year U.S. Treasury bonds rose from
5.9% to 8.2% between October 1993 and November 1994. They have since declined
over the past six months to approximately 7%.
Long-term interest rates are below levels when President Clinton was
elected in November 1992. As a result of this wide swing in long-term interest
rates within a reasonably short period of time, the net asset value of Vanguard
Preferred Stock Fund has exhibited significant volatility. However, the patient
investor who endured the roller coaster ride achieved high real rates of
tax-advantaged income over the last two and a half years without a loss in
principal.
The past six months were especially rewarding. For the six- and
twelve-month periods ended April 30, 1995, the Fund posted total returns of
+11.2% and +8.8%, respectively. The recent gains were achieved after one of the
worst periods in the Fund's history, when investors needed relief the most. The
recent decrease in rates was especially lucrative for holders of fixed-rate
perpetual preferreds which are perceived as having an infinite maturity when
they are at a discount to par value, as are a majority of the Fund's
securities.
The past six months also witnessed tender offers by IBM and General
Motors for their large preferred issues. As the economy has recovered and
companies have switched from losses to profits, preferred stock financing has
become relatively expensive to maintain. Several other preferred stock issuers
have also tendered for their stock and replaced it with more debt-like
instruments whose interest payments can be deducted on their income statements.
Thus, preferred stocks have rallied in anticipation of more such tenders and
have surged as the supply of preferreds eligible for the dividends received
deduction (DRD) diminished.
According to CS First Boston, in the first quarter of 1995, issuance
of traditional DRDs represented only 19% of preferred stock financing. The
remaining 81% were "taxable" preferreds. Thus, DRD-preferreds are being removed
through tenders while the new DRD-eligible supply represents a smaller amount
of total issuance. From an interest rate and from a technical standpoint, the
last six months were very favorable for DRD preferred stocks.
MARKET UPDATE
The new taxable preferred instruments, referred to as Monthly Income Preferred
Stocks (MIPS) or Quarterly Income Debt Securities (QIDS), allow the issuer to
deduct dividends as an interest expense. The new taxable preferreds have debt
characteristics, since the buyer of the preferred can force the company into
bankruptcy if the dividends are omitted. These particular preferreds also have
a maturity date, unlike a straight perpetual preferred. The issuer is permitted
by the rating agencies to apply a percentage of the stock to its equity capital
since it ranks below all senior debt of a company. The dividends do not qualify
for the DRD because of the taxable preferred's debt-like characteristics and,
therefore, the instrument is not appropriate for the Fund. A preferred stock
issuer now has an economic incentive to tender for its DRD- eligible preferred
and to issue a taxable preferred, since the issuer's after-tax cost of capital
will be lower using MIPS or QIDS.
INVESTMENT GOALS AND STRATEGY
Although the preferred market landscape is shifting, the investment goals and
strategy of the Fund remain consistent with those which were put in place when
the Fund was started in 1975. One of the primary goals in managing Vanguard
Preferred Stock Fund is to qualify all of the Fund's dividends for the 70%
intercorporate dividends received deduction. We achieved total qualification in
fiscal 1994, as we have in all previous years, and expect to do the same in
fiscal 1995.
Another objective is to provide sustainable, tax-advantaged income
through investment-grade preferreds. Sustainable income is achieved by
investing in the securities of high-quality companies with call protection.
With the average dollar price of the Fund's securities at a 5% discount to par,
reasonable income stability should be achievable. Stability of income should
also be strengthened by broad diversification with 66 preferred stock issuers
currently owned in the Fund.
(continued)
3
<PAGE> 4
The Fund's quality breakdown using Standard & Poor's ratings is as
follows: Cash (6%), AA (7%), A (35%), BBB (52%). There are no
below-investment-grade securities. As of April 30, 1995, 57% of the Fund's net
assets is concentrated in the electric and gas utility industry with 46 such
issuers. High-quality industrial issuers are becoming more difficult to find.
However, if the markets become relatively expensive for non-utility preferreds,
new issuers will appear. For instance, three years ago a highly rated
profitable industrial company issued a DRD preferred stock purportedly to buy
back shares of its common stock, which the company considered to be
undervalued. Thus, if the markets become distorted, new industrial issuers
could appear again. We still believe that the general health of the utility
industry is strong enough to merit holding slightly over half of the Fund's
assets in this sector.
Respectfully,
Earl E. McEvoy, Senior Vice President
Wellington Management Company
May 9, 1995
4
<PAGE> 5
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
Vanguard Preferred Stock Fund since inception through April 30, 1995. During
the period illustrated, stock prices fluctuated widely; these results should
not be considered a representation of the dividend income or capital gain or
loss that may be realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Merrill Lynch
Stock Fund Preferred
Value with Income -------------------------------- Index**
October 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total -------------
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Total Return
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (12/75) $10.00 -- -- $10.00 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
1976 10.41 -- $ .41 10.84 + 4.1% + 4.3% + 8.4% +15.0%
- ------------------------------------------------------------------------------------------------------------------------------------
1977 10.18 $.48 .85 12.05 + 2.5 + 8.7 +11.2 +10.5
- ------------------------------------------------------------------------------------------------------------------------------------
1978 9.39 .11 .83 12.24 - 6.7 + 8.3 + 1.6 - 2.2
- ------------------------------------------------------------------------------------------------------------------------------------
1979 8.24 -- .80 11.74 -12.2 + 8.1 - 4.1 - 4.9
- ------------------------------------------------------------------------------------------------------------------------------------
1980 7.49 -- .84 11.88 - 9.1 +10.3 + 1.2 - 3.4
- ------------------------------------------------------------------------------------------------------------------------------------
1981 6.67 -- .86 11.95 -10.9 +11.4 + 0.5 - 3.7
- ------------------------------------------------------------------------------------------------------------------------------------
1982 7.84 -- 1.01 16.26 +17.5 +18.6 +36.1 +27.0
- ------------------------------------------------------------------------------------------------------------------------------------
1983 7.96 -- .89 18.44 + 1.5 +11.9 +13.4 +16.6
- ------------------------------------------------------------------------------------------------------------------------------------
1984 7.41 -- .93 19.48 - 6.9 +12.5 + 5.6 + 5.3
- ------------------------------------------------------------------------------------------------------------------------------------
1985 8.13 -- .93 24.14 + 9.7 +14.2 +23.9 +23.4
- ------------------------------------------------------------------------------------------------------------------------------------
1986 9.76 .05 .84 32.01 +20.7 +11.9 +32.6 +37.9
- ------------------------------------------------------------------------------------------------------------------------------------
1987 8.02 -- .78 28.61 -17.8 + 7.2 -10.6 - 3.8
- ------------------------------------------------------------------------------------------------------------------------------------
1988 7.94 .12 .90 32.14 + 0.5 +11.9 +12.4 + 8.7
- ------------------------------------------------------------------------------------------------------------------------------------
1989 8.62 -- .53 37.23 + 8.6 + 7.2 +15.8 +14.5
- ------------------------------------------------------------------------------------------------------------------------------------
1990 8.22 -- .75 38.82 - 4.6 + 8.9 + 4.3 - 3.1
- ------------------------------------------------------------------------------------------------------------------------------------
1991 9.06 -- .78 46.91 +10.2 +10.6 +20.8 +28.8
- ------------------------------------------------------------------------------------------------------------------------------------
1992 9.32 -- .73 52.23 + 2.9 + 8.4 +11.3 +13.5
- ------------------------------------------------------------------------------------------------------------------------------------
1993 9.99 -- .71 60.35 + 7.2 + 8.4 +15.6 +10.4
- ------------------------------------------------------------------------------------------------------------------------------------
1994 8.35 .14 .70 55.25 -15.2 + 6.7 - 8.5 - 5.0
- ------------------------------------------------------------------------------------------------------------------------------------
1995 (4/30) 8.93 -- .33 61.44 + 6.9 + 4.3 + 11.2 + 9.8
- ------------------------------------------------------------------------------------------------------------------------------------
LIFETIME +514.4% +469.5%
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +9.8% +9.4%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains
distributions for both the Fund and the Index.
** Standard & Poor's Preferred Stock Index through 1989; Merrill Lynch
Perpetual Preferred Index thereafter.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
5
<PAGE> 6
FINANCIAL STATEMENTS
(unaudited)
April 30, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Rating Market
(Standard Value
& Poor's) Shares (000)+
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS (94.0%)
- -------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL (2.3%)
McDonald's Corp. 7.72% AA 265,000 $ 6,857
-------
- -------------------------------------------------------------------------------------------------------------------------
ENERGY (.4%)
Phillips Gas Co. 9.32% BBB- 50,000 1,294
-------
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL (34.7%)
H.F. Ahmanson & Co.
8.40% BBB- 140,000 3,570
Aon Corp. 8.00% AA- 300,000 7,500
Bank of Boston
7.875% BBB- 280,000 6,860
8.60% BBB- 100,000 2,563
BankAmerica 7.875% BBB+ 156,500 3,913
Beneficial Corp. $4.30 A- 39,950 2,137
Chase Manhattan Bank
8.32% BBB+ 150,000 3,806
9.08% BBB+ 75,000 1,950
Chemical Banking Corp.
7.50% BBB+ 150,000 3,637
8.375% BBB+ 325,000 8,287
Citicorp
7.50% BBB 40,000 940
8.30% BBB 275,000 6,875
Federal Home Loan
Mortgage Corp. 7.90% Aa3* 150,000 3,863
First Chicago Corp. 8.45% BBB+ 12,000 308
First Interstate
Bancorp 9.00% BBB 275,000 7,184
Ford Holdings 8.00% A 450,000 11,419
Great Western Financial
Corp. 8.30% BBB- 279,400 6,845
Household International,
Inc. 7.35% A- 350,000 8,181
Mellon Bank 8.20% BBB+ 200,000 5,075
Republic New York Corp.
7.75% A+ 50,000 1,263
U.S. Bancorp 8.125% BBB+ 125,000 3,109
Wells Fargo & Co. 9.00% BBB 150,000 3,881
-------
GROUP TOTAL 103,166
-------
- -------------------------------------------------------------------------------------------------------------------------
UTILITIES (56.6%)
Alabama Power Co.
6.40% A 200,000 4,400
7.60% A 125,000 3,094
Arizona Public Service
7.25% BBB- 275,000 5,878
Arkansas Power &
Light Co.
$1.96 BBB- 60,000 1,370
$2.40 BBB- 25,000 638
Atlanta Gas Light Co. 7.70% A- 100,000 2,488
Baltimore Gas & Electric Co.
6.70% A 39,700 3,442
7.125% A 40,000 3,686
Cincinnati Gas &
Electric Co. 7.44% BBB 20,000 1,800
Commonwealth Edison Co.
$7.24 BBB- 63,450 5,203
Connecticut Light &
Power Co. 5.28% BBB 8,000 256
Consolidated Edison Co. of NY
4.65% (Series C) A+ 10,000 570
Delmarva Power & Light Co.
6.75% A- 20,000 1,752
7.75% A- 100,000 2,500
Detroit Edison Co.
7.36% BBB 15,000 1,328
7.75% BBB 225,000 5,513
Duke Power Co.
6.375% A+ 80,000 1,810
7.00% A+ 50,000 4,647
7.85% A+ 25,000 2,553
Duquesne Light &
Power Co. $7.20 BBB 10,000 895
Florida Power & Light Co.
6.75% A 10,000 899
6.98% A 75,000 6,968
Gulf Power Co. 5.44% A 5,500 393
Idaho Power Co. 7.07% A- 25,000 2,273
Illinois Power Co. 7.75% BBB- 50,000 2,224
Indiana Michigan Power
Co. 7.08% BBB 15,000 1,253
Louisiana Power & Light
4.16% BBB- 7,000 341
4.44% BBB- 6,000 312
8.00% BBB- 30,000 701
Louisville Gas & Electric
Co. 7.45% AA- 25,000 588
Minnesota Power
& Light Co. $7.36 BBB+ 7,680 703
Mississippi Power Co.
7.25% A 140,000 3,220
Mississippi Power & Light
8.36% BBB- 20,000 1,956
Monongahela Power 7.73% A 50,000 4,975
Montana Power Co.
$2.15 BBB 33,500 846
6.875% BBB 50,000 4,199
New York State Electric
& Gas Corp. 6.48% BBB 29,500 2,308
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Rating Market
(Standard Value
& Poor's) Shares (000)+
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Oklahoma Gas &
Electric Co. 5.34% AA- 5,700 $ 398
Pacific Gas & Electric Co.
7.04% A- 300,000 6,675
Pacificorp 7.92% A- 150,000 3,750
PECO Energy Co. 7.48% BBB 50,000 4,524
Pennsylvania Power &
Light Co. 6.75% BBB+ 85,000 7,378
Potomac Electric Power Co.
$3.82 A- 25,000 1,241
PSI Energy Inc. 7.44% BBB 400,000 9,500
Public Service Electric
& Gas 4.18% BBB+ 10,000 500
Public Service Co. of
Colorado 7.15% BBB 16,000 1,376
Public Service of Oklahoma
4.24% A 4,300 236
San Diego Gas & Electric
Co. 6.80% A 140,000 3,076
Savannah Electric & Power
Co. 6.64% A 84,000 1,764
Sierra Pacific Power Co.
7.80% BBB+ 200,000 4,936
Southern California Edison
7.36% A 150,000 3,487
Texas Utilities Co.
$1.805 BBB- 80,000 1,770
$2.05 BBB- 75,000 1,819
7.50% BBB- 75,000 1,734
7.98% BBB- 45,000 4,302
Union Electric Power Co.
$7.64 A+ 29,000 2,891
Virginia Electric &
Power Co. $6.98 A- 45,000 4,045
$7.05 A- 50,000 4,558
Washington Natural Gas Co. 7.45% BBB- 240,000 5,280
8.50% BBB- 100,000 2,450
West Penn Power Co.
4.20% A 5,000 272
$7.12 A 3,900 351
Wisconsin Public Service Co.
6.76% AA 15,000 1,316
6.88% AA 10,000 893
-------
GROUP TOTAL 168,504
-------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $294,338) 279,821
- -------------------------------------------------------------------------------------------------------------------------
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.5%)
- -------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.93%, 5/1/95
(Cost $4,404) $4,404 $ 4,404
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (95.5%)
(Cost $298,742) 284,225
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (4.5%)
- -------------------------------------------------------------------------------------------------------------------------
Receivables for Securities Sold 12,576
Other Assets--Note C 2,477
Liabilities (1,691)
------
13,362
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------
Applicable to 33,327,436 outstanding shares
of beneficial interest (unlimited
authorization--no par value) $297,587
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $8.93
=========================================================================================================================
+ See Note A to Financial Statements.
* Rated by Moody's.
- -------------------------------------------------------------------------------------------------------------------------
AT APRIL 30, 1995, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
Amount Per
(000) Share
-------- -----
Paid in Capital $314,776 $9.44
Undistributed Net
Investment Income 3,775 .11
Accumulated Net
Realized Losses--Note D (6,447) (.19)
Unrealized Depreciation
of Investments--Note D (14,517) (.43)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $297,587 $8.93
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1995
(000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,120
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
- -------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . 12,217
- -------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B . . . . . . . . . . . . . . . . . . . . . . 360
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . . . . $296
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . 41 337
----
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . . . 37
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . 4
Trustees' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 1
- -------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 762
- -------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . 11,455
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . . . (4,744)
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . 23,665
- -------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . $30,376
=========================================================================================================================
</TABLE>
8
<PAGE> 9
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
APRIL 30, 1995 October 31, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DECREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . $ 11,455 $ 25,847
Realized Net Loss . . . . . . . . . . . . . . . . . . . . . . (4,744) (1,651)
Change in Unrealized Appreciation (Depreciation) . . . . . . . 23,665 (56,384)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . 30,376 (32,188)
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . (11,165) (27,337)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . -- (5,497)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . (11,165) (32,834)
- -------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CHARGES--Note A . . . . . . . . . . . . . . . . (466) (419)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . 17,404 84,895
--In Lieu of Cash Distributions . . . . . . . . . . 7,733 24,009
--Exchange . . . . . . . . . . . . . . . . . . . . 10,168 64,165
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . (34,909) (83,477)
--Exchange . . . . . . . . . . . . . . . . . . . . (26,697) (110,928)
- -------------------------------------------------------------------------------------------------------------------
Net Decrease from Capital Share Transactions . . . . (26,301) (21,336)
- -------------------------------------------------------------------------------------------------------------------
Total Decrease . . . . . . . . . . . . . . . . . . . (7,556) (86,777)
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . 305,143 391,920
- -------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . . . . . $297,587 $305,143
===================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . $.330 $.700
Realized Net Gain . . . . . . . . . . . . . . . . . . -- $.140
- -------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . 3,296 16,241
Issued in Lieu of Cash Distributions . . . . . . . . 928 2,636
Redeemed (7,435) (21,553)
- -------------------------------------------------------------------------------------------------------------------
(3,211) (2,676)
- -------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . $ 3,775 $ 3,951
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended October 31,
SIX MONTHS ENDED --------------------------------------------------
For a Share Outstanding Throughout Each Period APRIL 30, 1995 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $8.35 $9.99 $9.32 $9.06 $8.22 $8.62
----- ------ ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .330 .660 .690 .749 .765 .695
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . .580 (1.460) .685 .236 .855 (.350)
----- ------ ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . .910 (.800) 1.375 .985 1.620 .345
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.330) (.700) (.705) (.725) (.780) (.745)
Distributions from Realized Capital Gains . . -- (.140) -- -- -- --
----- ------ ----- ----- ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . (.330) (.840) (.705) (.725) (.780) (.745)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $8.93 $8.35 $9.99 $9.32 $9.06 $8.22
===========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +11.20% -8.45% +15.56% +11.34% +20.83% +4.28%
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . $298 $305 $392 $187 $90 $54
Ratio of Expenses to Average Net Assets . . . . . .52%* .51% .53% .58% .63% .65%
Ratio of Net Investment Income
to Average Net Assets . . . . . . . . . . . . 7.86* 7.27% 6.77% 7.43% 7.96% 8.69%
Portfolio Turnover Rate . . . . . . . . . . . . . 15%* 27% 45% 33% 18% 15%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
10
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
Vanguard Preferred Stock Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Market values for securities are based upon the latest
quoted bid prices. Temporary cash investments are valued at cost which
approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. EQUALIZATION: The Fund follows the accounting practice known as
"equalization," under which a portion of the price of capital shares issued
and redeemed, equivalent to undistributed net investment income per share
on the date of the transaction, is credited or charged to undistributed
income. As a result, undistributed income per share is unaffected by Fund
share sales or redemptions.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group of Investment Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is invested in repurchase
agreements secured by U.S. Government obligations. Securities pledged as
collateral for repurchase agreements are held by the Fund's custodian bank
until maturity of each repurchase agreement. Provisions of each agreement
ensure that the market value of the collateral is sufficient in the event
of default; however, in the event of default or bankruptcy by the other
party to the agreement, realization and/or retention of the collateral may
be subject to legal proceedings.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
B. Under the terms of a contract which expires May 31, 1996, the Fund pays
Wellington Management Company a basic investment advisory fee calculated at an
annual percentage rate of the average net assets of the Fund. For the six
months ended April 30, 1995, the investment advisory fee represented an
effective annual rate of .25 of 1% of Fund average net assets.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such services
are allocated to the Fund under methods approved by the Board of Trustees. At
April 30, 1995, the Fund had contributed capital of $42,000 to Vanguard
(included in Other Assets), representing .2% of Vanguard's capitalization. The
Fund's trustees and officers are also directors and officers of Vanguard.
D. During the six months ended April 30, 1995, the Fund made purchases of
$21,681,000 and sales of $58,019,000 of investment securities other than U.S.
Government securities and temporary cash investments.
At October 31, 1994, the Fund had available a capital loss carryforward of
$1,651,000 to offset future net capital gains through October 31, 2002.
At April 30, 1995, unrealized depreciation for financial reporting and Federal
income tax purposes aggregated $14,517,000, of which $2,518,000 related to
appreciated securities and $17,035,000 related to depreciated securities.
11
<PAGE> 12
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[THE VANGUARD GROUP LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus. All Funds in
the Vanguard Family are offered by prospectus only.
Q382-4/95
[VANGUARD
PREFERRED
STOCK FUND LOGO]
SEMI-ANNUAL REPORT
APRIL 30, 1995
