I know that many of you have seen the teasers for the “$1.10 a Day Retirement Plan” that are being sent around the interwebs by the folks at the 12% Letter — not many folks have the email marketing might of Stansberry & Associates, that letter’s publisher, and lots of you have been asking about this one.
It probably won’t surprise those of you who’ve been digging in the Gumshoe salt mines for any length of time, but this is not a brand new idea. Nor is it the first time it’s been teased — this same basic spiel has been pitched before by the Stansberry folks as the 801(k) Plan (get it? 801k is twice as good as 401k, right?), the 424 Dividend Boost, Black Market Income, the “Post Office Secret” for “One Share Millionaires” and Wal-tirement (though apparently Walmart sent them a cease and desist letter for that one — a letter that itself became a marketing ploy) …
… and others have teased it too, of course, as “Retirement Plan B” or as “Pension Paychecks” or any number of other mysterious-sounding names for what is a pretty long-lived, well-established and, well, otherwise boring investment strategy.
Boring works pretty well in investing, but it doesn’t work so great in marketing investment newsletters. Thus, the subterfuge.
So what is the pitch? Well, that hasn’t changed much in the five or six years (or longer, perhaps) they’ve been sending out very similar ads for the 12% Letter — the pitch is that for a tiny investment, starting with just one share, you can sit back and sacrifice little and built a massive nest egg.
And it’s sort of true.
Here’s how the ad gets you excited:
“Atlanta couple’s amazing… $1.10-A-Day Retirement Plan
“One prominent news source calls it, ‘A retirement plan that leads to easy street.’
“Atlanta, Georgia residents Jeremy and Lynn Trudeau recently built a nearly $100,000 retirement account simply by setting aside about a dollar per day—and they did it WITHOUT touching penny stocks… options… mutual funds… bonds… or anything even remotely risky.
“And, they’re sharing their story with the rest of America.
“Can you spare an extra dollar per day?”
And it gets more interesting when some of the details of the big numbers are shared … partly because there are a lot of people who are in a similar situation to the “Trudeaus,” so there are probably at least a few of you out there in Gumshoedom who identify with this kind of problem (and solution):
“Back in the mid-90s, the 50-something couple had almost nothing saved up for retirement.
“Decades of hefty mortgage payments, countless bills, and paying off their kids’ college tuition left the Trudeaus with just $122 for ‘the golden years.’
“That wasn’t enough to get them started in a brokerage account (which typically requires at least $1,000) or even a low-entry CD or mutual fund (which typically require at least $250).
“‘We didn’t have the money,’ recalls Lynn. ‘We had just finished putting our three sons through college.’
“Then a friend told them about a new way to pay for retirement…
“It’s a unique retirement opportunity… one that has actually been restricted by the U.S. government from being advertised to the general public (don’t worry it’s perfectly legal… and extremely easy to start).
“In fact, it’s supported by more than 400 of America’s biggest and richest organizations. More importantly, it enables you to collect $50,000… $75,000… even $100,000 or more, beginning with as little as a $1.10 a day.
“For a couple like the Trudeaus, the opportunity was a godsend. Their initial dollar per day stake is now worth nearly $100,000. And it’s still growing.”
And the ad also quotes a few major newspapers to reassure you that no, Dan Ferris isn’t making this up:
“While the government has done its best to keep this unique investment opportunity under wraps, it hasn’t been able to stop some in-the-know financial journals from revealing the details:
**The Atlanta Journal-Constitution writes, ‘Building substantial wealth by investing [what amounts to a dollar a day] isn’t a pipe dream.’
**The Boston Globe calls it ‘A retirement plan that leads to easy street.’
**MarketWatch says it’s ‘The best-kept secret on Wall Street.’
**The San Francisco Chronicle heard from one participant, ‘It’s almost impossible not to make money…'”
So yes, these plans are not really marketed, they’re sensible, they’re mostly low cost … but they’re not magic. What’s being teased is, broadly put, dividend reinvestment.
It sounds better to say it’s a unique opportunity, restricted by the government, and can help you collect $50,000 or $100,000 beginning with a buck a day — but really, the example of the Trudeaus given in the teaser, and so many others, are examples of people who consistently saved, let their dividends reinvest and compound, and ended up with nice-sized bank accounts.
If I told you to start out saving $30 a month and move it up gradually every month to save slightly more, and invest that money consistently in dividend-paying “blue chip” stocks and let the dividends compound and buy more shares, you probably wouldn’t be terribly shocked if it turned out that a habit that started at a dollar a day turned into $100,000 over 20 years. The 20 years part is important.
It’s not that first “dollar a day” that turns into $100,000, but that first dollar is the start of what can build into something substantial if you invest consistently, reinvest, compound the dividends … and, of course, if you choose the right stocks that really can be foundational holdings that you can halfway ignore for 20 years.
More specifically, the tease is for direct stock purchase plans (DSPPs) and dividend reinvestment plans (DRIPs), which are basically systems that are set up so you can buy stock directly from companies instead of through a brokerage firm. This was more revolutionary 40 years ago (or even 20 years ago), when full-service brokers charged $100 commissions and had high minimums and tried to hard-sell investors on their pet stocks, but there is still an argument to be made for these plans in the age of free and cheap discount brokerages and easy dividend reinvestment options in brokerage accounts — I’ll tell you where you can find some lists of these plans in a minute.
These plans are usually administered by one of the two or three big stock handling companies, and each company has a different set of rules — the only stock that Ferris lightly teases specifically in his ad is Walmart (WMT), which he’s made plain many times in the past that he likes as one of his “World Dominators”. And you don’t get any more stock in Walmart for your $50 or $100 or $500 if you buy direct through their DRIP or DSPP than you would if you bought through a broker, but you might get a better deal on the dividend reinvestment or more flexible regular or automated investment options. An account like this does not grow magically large, but if you pick the right “blue chips” or “world dominators” who have businesses that will survive most any crisis over the long term, and who pay a decent dividend and have a record of raising that dividend consistently and significantly every year, then the growth can really be very nice and maybe even startling … particularly if you can set the plan on autopilot and not think about it for a few years.
And yes, those articles that are cited in the ad are real — the San Francisco Chronicle one is here, from 2007. And the Marketwatch one, form 2005, can be read here. They won’t tell you anything shocking. Saving, compounding, choosing big, dominant, dividend-growing companies is boring, and it gives you a better chance of slowly growing your nest egg than anything else.
But be ready to put in some time. If you buy a stock that pays a dividend of 3% and can consistently grow the annual dividend by 10% a year, and get the actual underlying stock to also rise an average of 10% a year, and reinvest those dividends into new shares, then your investment should more than triple over ten years. If the stock price only goes up, say, 4% a year, and the dividend is increased just 8% a year, then your investment roughly doubles in ten years.
Adding more to the pile with additional savings each month or each quarter or whatever will obviously speed that up — assuming, of course, that you don’t end up with a stock that falls in value by 30% over those ten years or stops growing its dividend, as is not unheard of. But, assuming that you diversify with a half dozen or so companies that are, on average, consistent enough to generate those kinds of (very good and market-beating) returns, it’s a good first step … even if it is perhaps little solace to the 58-year-old who only has $10,000 saved for retirement. There isn’t an easy way to turn “not nearly enough savings” into “enough savings” just by investing, you have to save a lot more and invest reasonably well.
So that’s what the 12% Letter is really selling — their expertise in picking those dividend growth stocks that will be steadfast, rising in most markets and holding up better than average in weak markets, and always, always raising the dividend, without fail, at least once a year.
And the direct purchasing stuff, while a useful tool for imposing discipline if you want that, and in some cases a nice convenience, is of constantly declining importance as many direct purchase plans impose fees that are similar to discount brokers, or make recordkeeping more difficult, or whatever — but the custodians like Computershare are also getting better all the time, and the convenience of regular automatic investing can be really useful. You can browse the plans managed by Computershare here, or the ones from American Stock Transfer and Trust here. There are a few other banks and managers who run these services, but those are the two biggest that I’m aware of, and they have thousands of companies you can invest in directly.
Do note that every company has its own policies, minimums and procedures for DRIP/DSPP investing, and that the really compelling bonus features (like the stocks that let you reinvest dividends at a discount to the share price) are pretty rare. I prefer the flexibility of discount brokers who will reinvest my dividends automatically and without charge, but they don’t (with a few exceptions, like Sharebuilder) offer partial share purchases that some direct plans do, and those purchases (ie, putting exactly $250 a month into Intel shares, instead of $243.75 for 11 shares next month or $259 for 10 shares the following month) can make it more efficient to invest a flat amount monthly instead of buying only full shares.
Usually when folks look for these kinds of stocks they start with the mid-cap and large-cap companies who have established a pattern of dividend growth that they are extremely reluctant to break, even in down years — you can find all kinds of lists of dividend growth companies, but one good starting point is the Dividend Aristocrats list put together by S&P, the folks at BuyUpside have made a nice chart of them here that includes dividend growth rates. Some of the picks that I know Dan Ferris has touted before at the 12% Letter don’t have enough of a dividend record yet to make that list, picks like Cisco (CSCO) or Intel (INTC) (I know I’ve seen his Cisco teases, not sure about Intel), but others that he has touted like McDonald’s (MCD) and the one “secret” pick he alludes to in this letter, Walmart (WMT) are certainly on the list.
You can also buy ETFs or mutual funds that are focused on dividend growth, there are hundreds to choose from, but then you probably overdiversify and take on fund expenses and their trading expenses, which might dilute the impact of the compounding dividends by a little bit — or, in some cases, add what they so kindly call “manager risk” if you’re not just getting an indexed ETF. Of course, we all take on that “manager risk” when we choose our own stocks, too, but at least we can look at that manager in the mirror.
How about you? Any favorites in dividend growth land that you think make good candidates for DRIP investing, stocks that you can ignore (within reason) as they grow and compound on a nice gradual slope over time? Let us know with a comment below.
We’ve been talking about favorite newsletters of our readers quite a bit over the last couple days, and collecting more subscriber reviews, and the 12% Letter has come up several times as a relatively inexpensive and sober letter — you can see those reviews or add your own two cents here.
Disclosure: I own shares of Intel. I won’t trade in any stock mentioned above for at least three days.
Personal Capital is an advertiser with Stock Gumshoe, but Travis also uses it every day for his personal accounts and finds it invaluable. Here's what he said: "They offer a great (and genuinely FREE) 'second opinion' for your financial plan, but what I love most is their automated financial dashboard -- it will look at all your assets and debts, tally up your asset allocation, project where you'll be at retirement, and suggest ways to manage risk or improve returns. It's free, I think their free tools are great, and I think it's worth checking out -- you can do so here.