Fannie Mae and Freddie Mac, two of the largest mortgage financiers in the US, have a unique financial structure that includes preferred stock. This type of stock is senior to common stock and has a higher claim on assets in the event of bankruptcy.
Preferred stockholders receive a fixed dividend rate, which is currently 8.5% for Fannie Mae's Series P preferred stock. This is a significant yield, especially considering the current low-interest-rate environment.
Investors who buy Fannie Mae or Freddie Mac preferred stock are essentially lending money to the companies, which use the funds to finance mortgages. In return, investors receive regular dividend payments and the possibility of capital appreciation.
The preferred stock of Fannie Mae and Freddie Mac are listed on the OTC Bulletin Board (OTCBB) under the symbols FNMA-P and FMCC-P, respectively.
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Investment Strategies
FNMA preferred stock can be a valuable addition to a diversified investment portfolio, offering a relatively stable source of income and a lower risk profile compared to common stock.
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One key strategy is to focus on the stock's dividend yield, which has historically averaged around 5-6% annually, making it an attractive option for income-seeking investors.
Investors can also consider the stock's relatively low volatility, with a standard deviation of around 10-15% over the past few years, indicating a relatively stable price performance.
By diversifying their portfolio with FNMA preferred stock, investors can potentially reduce their overall risk and increase their returns, especially in a low-yield environment.
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Benefits and Risks
Investing in the stock market can be a great way to grow your wealth, but it's essential to understand the benefits and risks involved.
Diversification is key to minimizing risk, as it allows you to spread your investments across different asset classes, sectors, and geographic regions. This can help reduce volatility and increase potential returns.
Investing in a mix of low-risk and high-risk assets can help balance your portfolio and reduce overall risk. For example, investing in a combination of bonds and stocks can provide a stable income stream while also allowing for potential long-term growth.
Take a look at this: A Few Consideration When Investing for Preferred Stock Equity
Investing in the stock market can be a great way to grow your wealth, but it's essential to have a long-term perspective and be prepared to ride out market fluctuations. A study found that investors who held onto their stocks for at least five years had a significantly higher return on investment compared to those who sold their stocks prematurely.
A well-diversified portfolio can help you sleep better at night, knowing that your investments are spread out and less susceptible to market downturns.
Recover Losses in Fannie and Freddie
Over 1 million investors were pitched Fannie Mae and Freddie Mac preferred stocks by financial advisors and brokers as a conservative investment suitable for elderly clients or clients in or nearing retirement.
These investments paid a regular dividend and were often represented as risk-free or with minimal risk to the principal.
Clients were told that in the unlikely event Fannie Mae or Freddie Mac defaulted, the U.S. government would step in and cover their losses, which was a misrepresentation under most state security laws.
The real risks to Fannie Mae and Freddie Mac preferred stock holders were not properly disclosed to many investors, who may have recourse.
Bond holders in Fannie Mae and Freddie Mac were protected, but common shareholders and preferred shareholders were not offered any protections.
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At a Glance
Fannie Mae and Freddie Mac, two government-sponsored enterprises, have been under conservatorship since September 2008. Their regulator, the Federal Housing Finance Agency, took over management of their assets and business.
The Treasury owns dominant stakes in these GSEs and has allowed them to retain more of their earnings to rebuild their capital reserves since 2019. This move is aimed at returning the GSEs to private ownership.
The Congressional Budget Office (CBO) has examined options for recapitalizing the GSEs, which would involve allowing them to retain all of their profits for an initial period. This would be followed by selling new common stock to investors to replace the Treasury's ownership stake.
The CBO's analysis looks at how different scenarios would affect various factors, including cash flows between the GSEs and the Treasury, the possibility of releasing the GSEs from conservatorship, and the impact on mortgage markets and other federal institutions.
For another approach, see: Home Ownership and Equity Protection Act
Frequently Asked Questions
What does 7% preferred stock mean?
7% preferred stock refers to a type of stock that pays a 7% annual dividend, equivalent to $70 per $1,000 investment. This means investors receive a steady income stream, similar to a bond, with a relatively stable value
What does 8% preferred stock mean?
8% preferred stock refers to a type of equity investment that offers an 8% annual dividend payment. This means investors can expect a fixed return, but the company may choose to delay or skip dividend payments if needed
What is the downside of preferred stock?
Preferred stock comes with two main downsides: it has lower seniority than bondholders in case of bankruptcy, and it can be less liquid than other investments. This means preferred shareholders may not receive payment before bondholders and may struggle to sell their shares quickly.
What is the difference between preferred and ordinary shares?
Preferred shares have priority over ordinary shares in receiving dividends and liquidation payments, giving them a higher claim on a company's assets. This means preferred shareholders are paid before ordinary shareholders in case of a company's financial difficulties.
What is the preferred shareholder rule?
Preferred shareholders receive priority over common stockholders when it comes to dividend payments, which can be paid more frequently than common stock dividends. This gives them a higher claim on company earnings.
Sources
- https://www.fanniemae.com/about-us/investor-relations/stock-information
- https://bhseclaw.com/blog/recover-preferred-stock-losses-in-fannie-mae-and-freddie-mac/
- https://www.timelessinvestor.com/2017/12/19/comprehensive-list-of-preferred-stocks-of-fnma-and-fmcc/
- https://www.cbo.gov/publication/56511
- https://www.gurufocus.com/stock/FNMAS.PFD/summary
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