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Freddie Mac seeks to reduce risk by putting strict standards on the loans it will purchase and by trading financial derivatives such as credit-default swaps. As a government-chartered agency, FRE would appear to have access to ample financing. However, the firm is not insured by the government, and its earnings do tend to be volatile.

Freddie Mac is currently under investigation for accounting irregularities. It's been forced to restate its financial statements and to improve its accounting controls. Regulatory constraints have also been put in place to cap the firm's growth. 

Although these issues have weighed on the share price, Freddie Mac seems to be turning things around. Meanwhile, Freddie Mac has paid regular dividends on its common shares at an ever-increasing rate over the past two decades. Since 2003, the firm's common share quarterly dividend has nearly doubled to $0.50 per share.

Dividend:  FRE's preferred shares pay a $1.51 dividend, distributed quarterly. At today's share price, FRE-PX carries a 6.2% market yield.

Although the yield may seem a bit underwhelming at first, looks are deceiving. FRE-PX is a traditional preferred stock, making its dividend eligible for the reduced 15% tax rate. As such, you get to keep a larger share of the income than you would from most preferred stocks, and you can hold them in a taxable brokerage account.

The shares are highly rated as Aa3 (Moody's) / AA- (Standard & Poor's). That means they are very good quality and are considered to carry only slight long-term risk. They can't be called until June 2012 and don't have a maturity date.

Valuation:  If Freddie Mac were to exercise the option to redeem the shares, then you would receive $25 per preferred share. Since the shares are trading below that price, your principal would be protected if the shares were called.

Action To Take --->  Freddie-Mac's preferred shares have a generally attractive risk/reward profile in an otherwise highly volatile market. For investors with a fair dose of risk tolerance, they offer above-average fixed income.

Good Investing!

Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com

Carla has been employed in the investment industry for more than two decades. In addition to her work as a writer for several other nationally recognized financial publishers, her previous experience includes a position as President of a well-respected investor relations firm. She has also been writing shareholder reports for public companies (annual reports, speeches, corporate profiles, slide shows, etc.) since 1980.

A highly successful investment analyst, Carla specializes in high-yield, income-paying stocks. In that pursuit, she's always mindful to select companies that not only pay rich dividends, but that also have the potential to deliver strong long-term capital gains.

On the educational front, Carla holds both MBA and Ph.D. degrees. When she's not watching the market, she's teaching business courses at the college level and managing several million dollars in portfolio assets.

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