<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
During the six months ended April 30, 1996, the first half of the fiscal year
for Vanguard Preferred Stock Fund, the performance of the stock and bond
markets began to diverge as bonds lost considerable ground, while stocks
provided exceptionally strong returns. In this environment, the prices of
preferred stocks moved lower, but the steady accumulation of dividend income
buoyed the Fund to a positive return for the period.
The table below presents the total return (capital change plus
reinvested dividends) of Vanguard Preferred Stock Fund for the past six months
compared to the results of the average fixed-income mutual fund and the
unmanaged Merrill Lynch Perpetual Preferred Index, a broad measure of the
preferred stock market comprising more than 200 securities and having a total
market value of nearly $26 billion.
<TABLE>
<CAPTION>
- -----------------------------------------------------
TOTAL RETURN
----------------
SIX MONTHS ENDED
APRIL 30, 1996
- -----------------------------------------------------
<S> <C>
VANGUARD PREFERRED STOCK FUND +0.6%
- -----------------------------------------------------
AVERAGE FIXED INCOME MUTUAL FUND +1.2%
MERRILL LYNCH PERPETUAL
PREFERRED INDEX +2.6
- -----------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $9.61 per share on
October 31, 1995, and $9.32 on April 30, 1996, with the latter figure adjusted
to take into account the reinvestment of our dividend payments totaling $.35
per share from net investment income over the past six months. Based on the net
asset value on April 30, 1996, the Fund's current yield is 7.0%.
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 9.6% pre-tax yield in a bond fund to match the 7.0% pre-tax yield
provided by the Fund (assuming a maximum marginal tax rate of 35%).
SIX-MONTH OVERVIEW
Not content to rest on the laurels of last year's near record-breaking equity
returns, the stock market continued to advance during the past six months.
Stocks, after taking a breather in October 1995 (the only month in the past 17
with a negative total return), climbed higher in each successive month of the
semi-annual period. This advance came despite the pressure of rising interest
rates, which often is accompanied by stock market weakness. In a volatile
environment, the yield on long-term U.S. Treasury bonds rose from 6.2% on
October 31, 1995, to 6.8% on April 30, 1996.
Although the Federal Reserve lowered short-term interest rates in
December and January, the bond market fretted over the apparent strength of the
U.S. economy and the possibility of an increase in inflation. During the past
three months, as the performance of the stock and bond markets "decoupled,"
long-term U.S. Treasury bonds lost a total of more than 8%, while stocks
continued to creep higher. It remains to be seen whether the stock market has
enough earnings growth momentum to withstand the competition for investors'
dollars that higher-yielding bonds might provide.
While the past six months were difficult for interest-rate-sensitive
securities of all stripes, they were especially challenging for Vanguard
Preferred Stock Fund. As we mentioned in our Annual Report six months ago,
preferred stocks, due largely to their longer effective maturities, tend to be
somewhat more price sensitive than long-term bonds. As a result, preferred
stocks generally provide a relative advantage over long-term bonds when
interest rates decline; however, they also suffer from a commensurate
disadvantage when interest rates increase. Although the Fund enjoyed a
"principal reward" during our 1995 fiscal year, the first half of 1996 has
resulted in a slight "principal penalty" relative to the average fixed-income
mutual fund.
(continued)
1
<PAGE> 2
IN SUMMARY
During the remainder of our fiscal year, we intend to stay the course with the
consistent objectives and policies we have established for Vanguard Preferred
Stock Fund. The Fund provides a high-quality, diversified portfolio of
preferred stocks, with the objective of maximizing dividend income that
qualifies for the 70% intercorporate dividends received deduction.
In closing, we believe the Fund represents a sound
investment--particularly for the corporate investor--as part of a balanced
portfolio of stock funds, bond funds, and money market funds, as appropriate.
We look forward to reporting to you in further detail in our 1996 Annual Report
six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------------
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
- -----------------------
John J. Brennan
President
May 8, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
2
<PAGE> 3
AVERAGE ANNUAL TOTAL RETURNS
THE CURRENT YIELD QUOTED IN THE MESSAGE TO SHAREHOLDERS IS CALCULATED IN
ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED MARCH 31, 1996) 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 +14.35% +10.16% +8.98% +8.58% +0.40%
</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.
SUMMARY RESULTS
<TABLE>
<CAPTION>
$100,000 INVESTMENT ON DECEMBER 3, 1975 (10,000 SHARES)
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TAKEN IN CASH
Dividends from Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,400
Distributions from Net Realized Capital Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000
Net Asset Value April 30, 1996 (10,000 shares) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,200
- ------------------------------------------------------------------------------------------------------------------
INCOME DIVIDENDS TAKEN IN CASH, CAPITAL GAINS DISTRIBUTIONS ACCEPTED IN ADDITIONAL SHARES
Dividends from Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,938
Net Asset Value April 30, 1996 (10,970 shares) . . . . . . . . . . . . . . . . . . . . . . . . . . $102,239
- ------------------------------------------------------------------------------------------------------------------
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS ACCEPTED IN ADDITIONAL SHARES
Net Asset Value April 30, 1996 (73,850 shares) . . . . . . . . . . . . . . . . . . . . . . . . . . $688,278
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 4
REPORT FROM THE INVESTMENT ADVISER
For the six- and twelve-month periods ended April 30, 1996, the Fund posted
total returns of +0.6% and +12.0%, respectively. Long-term interest rates rose
approximately 0.60% in the past six months while three-month rates actually
fell over 0.25%. Thus the yield curve steepened sharply as the gap between
short and long rates widened. The Federal Reserve lowered short rates twice
since our last letter to you in November: once in December and again in
January. Long rates increased even though the monetary authorities were
actively easing because the fixed-income markets had anticipated additional
reductions in short rates which did not materialize. Further lowering of short
rates seems to be more distant now after evidence recently surfaced that the
economy was re-awakening from the government's temporary shutdown and from the
harsh winter weather.
The preferred stock market's turmoil from the Treasury Department's
budget proposal last December to lower the dividends received deduction (DRD)
from 70% to 50% has disappeared. This suggested change in tax legislation would
have sliced 8% off the price of a typical DRD eligible perpetual preferred. The
price would have to fall to such a large extent to restore the preferred's
yield to the same after-tax equivalent as before the proposed lowering of the
DRD.
By February of this year, skepticism developed about the likelihood of
the proposal passing Congress, and liquidity was restored to the preferred
market. According to Merrill Lynch & Co., new issuance of preferreds in the
first quarter of 1996 qualifying for the DRD exceeded the total for all of
1995. However, banks and utility issuers continued to call older preferreds to
reduce their cost of capital. Thus supply from new issues and reinvestment of
proceeds from calls kept supply and demand in balance.
MARKET UPDATE
Moody's Investors Services recently completed a study of preferred stock
dividend omissions from 1980 until 1994 which we find noteworthy. During this
period, 99 issuers omitted preferred dividends, of which only six were
investment-grade rated in the year in which the dividend was omitted.
Approximately half of the issuers that omitted dividends, according to the
Moody's study, ended up in bankruptcy proceedings. The risk of dividend
omission was twice as great in the single "B" category as in the "Ba" category
(both ratings are below-investment-grade ratings, and securities rated as such
are currently not expected to be purchased in Vanguard Preferred Stock Fund).
Therefore, the odds of dividend impairment increase dramatically when investors
purchase preferred stocks rated below-investment-grade. This underscores the
primary reason for the Fund's focus on investment-grade securities. It also
underscores the importance of credit research in this area.
INVESTMENT GOALS AND STRATEGY
The investment goals and strategy of the Fund remain consistent with those
which were put in place when the Fund was started in 1975. Relatively
high-quality preferred stocks are purchased with the goal of qualifying all of
the Fund's dividends for the 70% intercorporate dividends received deduction.
We achieved total qualification in fiscal 1995, as we have in all previous
years and expect to do the same in fiscal 1996. Another objective is to provide
sustainable, tax-advantaged income through investment in investment-grade
preferreds. The risk to the Fund's net asset value from the lowering of the DRD
is always present and cannot be predicted. The risk to the Fund from rising
long-term interest rates is also a constant. However, we can attempt to control
income risk and variability by investing in the securities of high-quality
companies with call protection. Stability of income should also be strengthened
by broad diversification. There are 59 preferred stock issuers currently owned
in the Fund.
The Fund's quality breakdown, using Standard & Poor's ratings, is as
follows: cash (3%), AA (10%), A (41%), BBB (46%). Forty-nine percent of
Vanguard Preferred Stock Fund, a decrease of 5% in the last six
4
<PAGE> 5
months, is concentrated in the electric and gas utility industry with 35 such
issuers. We continue to believe that the risks and rewards from investing
approximately half of the Fund's assets in the utility industry are favorably
balanced. We also seek to own high-quality industrial issuers which are more
difficult to find since they can access less expensive sources of capital.
Respectfully,
Earl E. McEvoy, Senior Vice President
Portfolio Manager
Wellington Management Company
May 9, 1996
5
<PAGE> 6
SPECIAL NOTICE TO SHAREHOLDERS
NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES
We are pleased to announce that the Board of Trustees of Vanguard Preferred
Stock Fund has reached an agreement with Wellington Management Company (WMC),
the Fund's investment adviser, on a revised investment advisory agreement. The
revised agreement involves a reduction in the annual rate of advisory fees to
be paid to WMC. At the Fund's current asset level of $286,263,000, the dollar
amount of the annual fee would decline from $717,000 to $386,000, a reduction
of $331,000. The new effective annual fee rate would equal 0.135% of the
Fund's current net assets and would decline further if assets were to continue
to grow.
Under the terms of the new agreement, the Fund will pay WMC a basic
advisory fee at the end of each fiscal quarter based on the Fund's average
month-end net assets during the quarter. The quarterly rate is applied
according to the following annual fee schedule:
<TABLE>
<CAPTION>
- ------------------------------------------
ANNUAL BASIC
NET ASSETS FEE RATE
- ------------------------------------------
<S> <C>
FIRST $200 MILLION 0.150%
NEXT $200 MILLION 0.100
OVER $400 MILLION 0.075
- ------------------------------------------
</TABLE>
This revised investment advisory agreement replaces the Fund's current
agreement with the adviser dated June 1, 1980, and will go into effect on
August 1, 1996. Until the effective date, the adviser has agreed to waive its
advisory fees to the extent necessary to abide by the new fee schedule. For the
fiscal year ended October 31, 1995, the Fund paid approximately $707,000 to WMC
for investment advisory services.
The adviser, located at 75 State Street, Boston, Massachusetts, is a
professional investment advisory firm which globally provides investment
services to investment companies, institutions, and individuals. Among the
clients of WMC are 12 investment companies of The Vanguard Group. Under the
terms of its investment advisory agreement with the Fund, the adviser agrees to
manage the investment and reinvestment of the assets of the Fund and to
continuously review, supervise, and administer the Fund's investment program.
The adviser discharges its responsibilities subject to the control of the
officers and trustees of the Fund.
6
<PAGE> 7
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, 1996. 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*
- --------------------------------------------------------------------------------------------------------------------
Merrill Lynch
Preferred Preferred
Stock Fund Index**
Value with Income ---------------------------- -------------
October 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return 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 -- .775 28.61 -17.8 + 7.2 -10.6 - 3.8
- --------------------------------------------------------------------------------------------------------------------
1988 7.94 .12 .895 32.14 + 0.5 +11.9 +12.4 + 8.7
- --------------------------------------------------------------------------------------------------------------------
1989 8.62 -- .525 37.23 + 8.6 + 7.2 +15.8 +14.5
- --------------------------------------------------------------------------------------------------------------------
1990 8.22 -- .745 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 -- .725 52.23 + 2.9 + 8.4 +11.3 +13.5
- --------------------------------------------------------------------------------------------------------------------
1993 9.99 -- .705 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 9.61 -- .65 68.40 +15.1 + 8.7 +23.8 +18.0
- --------------------------------------------------------------------------------------------------------------------
1996 (4/30) 9.32 -- .35 68.83 - 3.0 + 3.6 + 0.6 + 2.6
- --------------------------------------------------------------------------------------------------------------------
LIFETIME +588.3% +527.9%
- --------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +9.9% +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.
7
<PAGE> 8
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
April 30, 1996
<TABLE>
<CAPTION>
Rating Market
(Standard Value
& Poor's) Shares (000)+
- --------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS (97.2%)
- --------------------------------------------------------------
CONSUMER CYCLICAL (5.2%)
Ford Motor Co. 8.25% A 300,000 $ 7,987
McDonald's Corp. 7.72% AA 265,500 6,870
----------
SECTOR TOTAL 14,857
----------
- --------------------------------------------------------------
ENERGY (.5%)
Phillips Gas Co. 9.32% BBB- 50,000 1,294
----------
- --------------------------------------------------------------
FINANCIAL (42.9%)
H.F. Ahmanson & Co.
8.40% BBB- 240,000 6,180
Aon Corp. 8.00% AA- 175,000 4,441
Bank of Boston
7.875% BBB- 280,000 7,105
8.60% BBB- 97,400 2,520
BankAmerica 7.875% A- 100,000 2,550
Bankers Trust New York
Corp. 7.50% BBB+ 175,000 4,266
Beneficial Corp. $4.30 A- 42,550 2,595
The Chase Manhattan Corp.
7.50% BBB+ 150,000 3,712
8.32% BBB+ 139,600 3,560
8.375% BBB+ 253,000 6,451
Citicorp
7.50% A- 84,000 2,058
7.75% A- 125,000 3,141
8.30% A- 275,000 7,013
Federal Home Loan
Mortgage Corp. 7.90% Aa3* 100,000 2,575
First Chicago NBD Corp.
8.45% A- 12,000 309
First Maryland Bancorp
7.875% BBB+ 250,000 6,281
Fleet Financial Group
6.75% BBB 125,000 5,625
Great Western Financial
Corp. 8.30% BBB- 300,000 7,613
Household International,
Inc. 7.35% A- 400,000 9,850
MBNA Corp. 7.50% BBB- 200,000 4,825
Mellon Bank 8.20% BBB+ 200,000 5,075
J.P. Morgan & Co., Inc.
6.625% AA- 250,000 11,500
Republic New York Corp.
7.25% A+ 86,000 2,128
TransAmerica 8.50% A- 48,700 1,272
U.S. Bancorp 8.125% BBB+ 150,000 3,788
Wells Fargo & Co. 9.00% BBB 250,000 6,500
----------
SECTOR TOTAL 122,933
----------
- --------------------------------------------------------------
UTILITIES (48.6%)
Alabama Power Co.
6.40% A 200,000 4,450
7.60% A 125,000 3,172
Arizona Public Service Co.
7.25% BBB- 175,000 4,244
Atlanta Gas Light Co. 7.70% A- 100,000 2,550
Baltimore Gas & Electric Co.
6.70% A 39,700 3,712
6.99% A 25,000 2,438
7.125% A 40,000 3,965
Commonwealth Edison Co.
$7.24 BBB- 50,000 4,750
Delmarva Power & Light Co.
6.75% A- 20,000 1,903
7.75% A- 160,000 4,109
Detroit Edison Co.
7.75% BBB 125,000 3,172
Duke Power Co.
6.375% A+ 97,900 2,362
7.00% A+ 50,000 4,983
7.85% A+ 25,000 2,567
Entergy Arkansas Inc.
$1.96 BBB- 60,000 1,468
Entergy Louisiana Inc.
4.16% BBB- 7,000 367
4.44% BBB- 6,000 330
8.00% BBB- 30,000 735
Entergy Mississippi Inc.
8.36% BBB- 20,000 2,000
Florida Power & Light Co.
6.75% A+ 10,000 962
6.98% A+ 75,000 7,412
Gulf Power Co. 5.44% A 5,500 412
Idaho Power Co. 7.07% A 25,000 2,407
Illinois Power Co. 7.75% BBB- 25,000 1,252
Mississippi Power Co.
7.25% A 100,000 2,500
Monongahela Power Co.
7.73% A 50,000 5,194
Montana Power Co.
6.875% BBB 25,000 2,350
Oklahoma Gas &
Electric Co. 5.34% AA- 5,700 433
Pacific Gas & Electric Co.
7.04% A- 150,000 3,694
PacifiCorp 7.92% A- 150,000 3,806
PECO Energy Co. 7.48% BBB 50,000 4,878
Pennsylvania Power &
Light Co. 6.75% BBB+ 85,000 7,864
PSI Energy Inc. 7.44% BBB+ 300,000 7,688
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Rating Market
(Standard Value
& Poor's) Shares (000)+
- --------------------------------------------------------------
<S> <C> <C> <C>
Public Service of Oklahoma
4.24% A 4,300 $ 260
San Diego Gas & Electric Co.
6.80% A 140,000 3,329
Savannah Electric & Power Co.
6.64% A 84,000 1,995
Sierra Pacific Power Co.
7.80% BBB+ 200,000 5,370
Southern California Edison
7.36% A 150,000 3,656
Texas Utilities Electric Co.
7.50% BBB 52,000 1,313
7.96% BBB 45,000 4,641
Union Electric Power Co.
$7.64 A+ 29,000 2,982
Virginia Electric &
Power Co.
$6.98 A- 45,000 4,412
Washington Natural Gas Co.
7.45% BBB- 240,000 5,880
West Penn Power Co.
4.20% A 5,000 290
Wisconsin Public Service Co.
6.88% AA 10,000 974
----------
SECTOR TOTAL 139,231
----------
- --------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $280,806) 278,315
- --------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.4%)
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.32%, 5/1/96
(Cost $6,859) $6,859 6,859
- --------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(Cost $287,665) 285,174
- --------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.4%)
- --------------------------------------------------------------
Other Assets--Note C 2,006
Liabilities (917)
----------
1,089
- --------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------
Applicable to 30,705,896 outstanding
shares of beneficial interest
(unlimited authorization--no
par value) $286,263
- --------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.32
==============================================================
</TABLE>
+See Note A to Financial Statements.
*Rated by Moody's.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
AT APRIL 30, 1996,
NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL $290,774 $9.46
UNDISTRIBUTED NET
INVESTMENT INCOME 3,532 .12
ACCUMULATED NET
REALIZED LOSSES (5,552) (.18)
UNREALIZED DEPRECIATION
OF INVESTMENTS--NOTE D (2,491) (.08)
- ---------------------------------------------------------------
NET ASSETS $286,263 $9.32
- ---------------------------------------------------------------
</TABLE>
9
<PAGE> 10
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1996
(000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,279
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,649
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B . . . . . . . . . . . . . . . . . . . . . . . . . . 203
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . . . . . . . . $296
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 331
----
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Trustees' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
- -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 595
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . 11,054
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . 78
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,177)
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . . . . . $ 1,955
===================================================================================================================
</TABLE>
10
<PAGE> 11
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
APRIL 30, 1996 October 31, 1995
(000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,054 $ 22,230
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 (3,927)
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . . . . . (9,177) 44,868
- -----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . . . 1,955 63,171
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,269) (21,652)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . (11,269) (21,652)
- -----------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CHARGES--Note A . . . . . . . . . . . . . . . . . . . . . . . . (151) (631)
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,403 56,956
Issued In Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . . . . 8,306 15,335
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (52,985) (110,318)
- -----------------------------------------------------------------------------------------------------------------------
Net Decrease from Capital Share Transactions . . . . . . . . . . . . (12,276) (38,027)
- -----------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . . . . . . . (21,741) 2,861
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308,004 305,143
- -----------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $286,263 $ 308,004
=======================================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,435 6,474
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . 887 1,745
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,680) (12,694)
- -----------------------------------------------------------------------------------------------------------------------
(1,358) (4,475)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended October 31,
SIX MONTHS ENDED --------------------------------------------------
For a Share Outstanding Throughout Each Period APRIL 30, 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . $9.61 $8.35 $9.99 $9.32 $9.06 $8.22
------- -------- ------- -------- -------- --------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .35 .66 .66 .690 .749 .765
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . (.29) 1.25 (1.46) .685 .236 .855
------- -------- ------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . .06 1.91 (.80) 1.375 .985 1.620
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.35) (.65) (.70) (.705) (.725) (.780)
Distributions from Realized Capital Gains . . . . . . -- -- (.14) -- -- --
------- -------- ------- -------- -------- --------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.35) (.65) (.84) (.705) (.725) (.780)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . $9.32 $9.61 $8.35 $9.99 $9.32 $9.06
==========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . +0.63% +23.79% -8.45% +15.56% +11.34% +20.83%
- --------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . $286 $308 $305 $392 $187 $90
Ratio of Expenses to Average Net Assets . . . . . . . . . .39%* .52% .51% .53% .58% .63%
Ratio of Net Investment Income
to Average Net Assets . . . . . . . . . . . . . . . . 7.23%* 7.43% 7.27% 6.77% 7.43% 7.96%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . 30%* 20% 27% 45% 33% 18%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
12
<PAGE> 13
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 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 a custodian bank until maturity of each
repurchase agreement. Provisions of each agreement require 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 July 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, 1996, the investment advisory fee represented an
effective annual rate of .13 of 1% of Fund average net assets, after giving
effect to a fee waiver of $170,000 (an annual rate of .11 of 1% of average net
assets).
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
C. The Vanguard Group 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, 1996,
the Fund had contributed capital of $32,000 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 year ended April 30, 1996, the Fund made purchases of
$45,016,000 and sales of $60,529,000 of investment securities other than U.S.
Government securities and temporary cash investments.
At October 31, 1995, the Fund had available a capital loss carryforward of
$5,578,000 to offset future net capital gains of $1,651,000 through October 31,
2002, and $3,927,000 through October 31, 2003.
At April 30, 1996, unrealized depreciation for financial reporting and Federal
income tax purposes aggregated $2,491,000, of which $3,706,000 related to
appreciated securities and $6,197,000 related to depreciated securities.
14
<PAGE> 15
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman of the Board
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President and Chief Executive Officer
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.; Director of Westinghouse Electric Corporation.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
- -------------------------------------------------------------------------------
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DISTEFANO F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Information Technology Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
15
<PAGE> 16
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 Selected Value Portfolio
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 Portfolio
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 Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
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]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-7447 1 (800) 662-2739
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.
Q382-4/96
VANGUARD
PREFERRED
STOCK FUND
SEMI-ANNUAL REPORT
APRIL 30, 1996
