“The Endless Paycheck Portfolio” Chris Mayer

by Travis Johnson, Stock Gumshoe | August 26, 2008 9:08 pm

“Using this three-step “paycheck portfolio” plan… tap into an endless stream of income, for as long as you’ll need it… starting with as many as 75 checks, sent automatically to your account.”

Not bad, eh?

That’s the tease from Chris Mayer[1] and the Capital and Crisis[2] newsletter from Agora[3] (which is not to be confused with the Crisis Trader[4] newsletter from Taipan[5], which likes to trade on political instability in the third world — Capital and Crisis is more of a “Jack of all trades” newsletter, as far as I can tell).

And it has all the hallmarks of a well-copywritten ad for an investment newsletter … it’s got the long list of real peoples’ names and the amount of money each of them made with their “endless paychecks” (forgetting, for the moment, that unless we know the size of their portfolio then the dollar amounts they receive are utterly meaningless).

And there’s a quote from someone who sounds important, with the detailed “clues” redacted …

“‘[This strategy] is the hidden key… [if more people
did this], you would see a nation of happy
investors whistling their way toward retirement[6].’

— Lowell Miller, 3-time author and CNN commentator”

(Gee, whatever could it be? You can go here and read the source of that quote[7] if you like … or just read on, and I’ll do a bit more digging and explainifying.)

And there’s a “system” that the editor of this newsletter uses to pick the investments that make this “endless paycheck” stream begin flowing …

“Yet the steps that make it possible are so simple, I’m almost embarrassed to share them:

“Step One: Lock in income streams that build your wealth faster than inflation

“Step Two: Focus on income streams that will grow even bigger with time

“Step Three: Look for a passive income stream that won’t “retire” when you do.

“I’ve written a brand-new research report that shows you how to make each of these steps very easily. This new report is called The Ultimate Paycheck Portfolio: Double-Digit Yields… Even in Flat Markets. It shows you how to apply each step quickly, allowing you to start collecting income checks within just a few weeks of reading this letter.”

So yes, I can see why he’s a bit embarrassed — those are, of course, the hallmarks of many great investment strategies (most of which, we must note, do focus on investments that grow over time, and that beat inflation).

And I will confess, I also like investments that grow over time, spit off income, and outperform inflation. And I’m not embarrassed to share this secret, inner strategy with the Gumshoe faithful.

But we had a point, yes? Hmm, moving on. Something teased here?

Indeed — we hear the facts, sans company names or tickers, about several compelling dividend investment ideas … sorry, did I spoil the surprise? I meant, three “automatic paycheck” investments that we should be buying hand over fist, right now, while the cash is out there for the plucking!

Whew. So what are they? I’ll get through at least one today, and if the rest look interesting I’ll keep digging for you in future articles …

“Automatic “Paycheck” #1: An $838.4 Million Giveaway You Can Still Tap This Year”

What do we learn about this “endless paycheck” from the clues given?

They’ve paid out $838.4 million to shareholders since 1997.

Some specifics about the company?

It’s a timber[8] company. A little explanation …

“Here’s the thing. Timber stocks tumbled as housing construction slowed. But Asian timber demand has remained massive… which is a fact many hair-trigger market amateurs have completely overlooked.

“Meanwhile, because of the nature of the business, this company also works something like a REIT — the real estate[9] trusts that get taxed at a minimal corporate level — maximizing even more cash to dole out to you, as a shareholder on the company “payroll.”

“But with this specific move, here’s the best part…

“You Get Paid no Matter What

“When timber demand is high, the cash rolls in.

“And indeed, this company just had a knockout year.

“But even when demand slacks off — unlike with most other businesses — the timber assets just get more valuable. Even sitting still, they can grow in value as a company asset by as much as 10% per year.

“Can you imagine if your house… your bank account… the value of your car or any stocks you might own… could all automatically grow 10% more valuable, year after year?

“This, plus the continuing surge in Asian demand, leaves this company flush with piles of cash to divide up among shareholders, in the form of personal checks, sent to you directly in the mail.”

This company is currently yielding about 9%, according to the teaser ad.

We also get a little bit of an explanation for why these companies would wish to pay out so much cash …

“First of all, the checks we’re talking about are shared with only these cash-paying companies’ shareholders. And who usually owns the most shares of all in any given company?

“The board members and insiders.

“Doling out cash incentives to shareholders is a great way for them to take extra cash flow out of the business at a lower tax rate. When they get salaries or bonuses, that money gets taxed as income.

“But not these passive “paycheck” payouts.

“Of course, you get the same lower tax benefits on these payouts, too.

“Another reason cash-heavy companies love to share cash with shareholders is that it’s a great way to reward loyal stock buyers and keep the shares stable, or even rising, during rough markets.

“It’s that simple. The companies that can afford to give away the cash do better by doling out cash to you than by lending the cash or spending it themselves.”

Amazing wordsmithing skills to get through that entire explanation without using the word “dividend” and letting us in on the secret, eh?

It gets better…

“This is one of a few companies doing this that loves to fatten up “paychecks” even more when the money is really flowing. For instance, that’s what the board of directors of this company did in October last year.

“After having a banner month, they got together and decided to double that month’s payout.”

So it’s not just dividends[10], it’s dividend growth we’re after. Again, this will not be a surprise to most people who know the definition of the word “dividend” — all else being equal, we like cash payouts that grow over time.

I’ll just let that lightning bolt of wisdom zap around in your cranium for a minute.

OK, now … the name of the company?

This has to be …

TimberWest (TWF in Toronto, TWTUF on the pink sheets)

You can see their explanation of investor returns from the company website[11] — it’s a little bit complicated, and I have no idea what the tax treatment of their dividends would be. But yes, they have been around since 1997, paying out cash to shareholders, and have now paid out roughly $859 million to shareholders, but that includes the July payment. As of the first quarter’s release this year, they had paid out exactly $838.4 million to shareholders. Sorry, unitholders. The traded shares here are not common stock, but are “stapled units,” which seem to somehow combine a debt instrument with an income trust unit.

And I must confess that there’s a tiny bit of doubt here — they note in the clues that the company raised the payout “last October,” and I don’t see any indication that they did so. Business was pretty weak last Fall, too, so they certainly didn’t have a big pile of cash to get rid of. It’s possible that they sold some land or other assets and issued a special dividend of some kind, but if so I missed it. Still, the other clues fit perfectly and I suspect there isn’t another timber firm that paid out exactly $838.4 million (Canadian, one assumes).

So assuming the incredibly wise and handsome Gumshoe is right with this one, what is the company all about?

Well, they own big swaths of land, and sawmills, and they harvest the timber and sell the wood. That’s pretty much the business. That, and they sell of land sometimes when development gets close enough to their properties to make a sale worthwhile — this selling of “higher and better use” land is typical of most timber companies, including the US-based timber REITs[12] Plum Creek and Rayonier (I own shares of Rayonier, for full disclosure).

Timberwest appears to be largely in far Western British Columbia, and they manage primarily second growth forest on private land, not government land and not the timber closer to the Rocky Mountains that appears to be getting chomped up by the evil borer beetles that are decimating much of the BC pine forests and moving East and South. So maybe those are good things — their timber is close to the Pacific ports if Asian lumber demand picks back up, particularly in Japan[13], and they probably don’t have the same environmental constraints as companies that are on public land.

But business stinks right now. The fact that these stapled units include a debt instrument means that the payouts have to continue at a stead rate (the payouts have been the same for years, about $1.07 a year), at least as far as I can tell, but they’re not actually making a cash profit at the moment. That’s because, as noted above, timber prices aren’t so great right now — and to add to that, the strong Canadian dollar hurts their export potential to both the US and Japan.

TimberWest has said recently that they’re only operating at about 60% capacity in harvesting — meaning that they’re letting the forests grow instead of cutting them down, in hopes that prices will be better in the future. And the trees will continue to grow, so those trees should, in theory, be more valuable when they are eventually harvested. TimberWest has not had any “distributable cash” yet this year, and they don’t think the future looks that much better, at least for the next year or so. They’ll keep making the unit payments as long as they can, but they will probably have to either go cash flow positive at some point or start selling off assets.

They also have noted in their most recent release that they’re not certain about their ability to continue to satisfy their debt covenants in the future, though they are currently in compliance. That might be bad news in the years to come if their business doesn’t turn around.

I agree that Timber is a good investment in the long term — and over long time periods, it has significantly outperformed common stocks and most other asset classes, with less volatility. I have something less than 5% of my portfolio in Timber, in my case I use Rayonier (RYN)[14] because I think they have some other attractive assets in addition to their timber land, but you might find that TimberWest is a better fit for you if you research it further and make yourself comfortable with their future. You should, at the very least, read up on the company, including their most recent few SEDAR filings (the Canadian equivalent of the SEC’s EDGAR) — the company makes them available here [15]if you want to peruse.

TimberWest certainly has a much higher yield than the US timber REITs, though it’s worth remembering that the yield won’t be sustainable for all that long unless they start making money. Plum Creek (PCL) is a larger US timber REIT that many folks also like, and you could also consider the big timber owners that are not REITs, like Deltic Timber (DEL) or the paper companies if you don’t care much about dividends, or something like Brookfield Asset Management (BAM)[16] that owns and manages quite a bit of timber as part of their alternative asset investment business. And there are other Canadian trusts that own timber, too, like Cross Timbers (CRT). To me, TimberWest looks a little too hairy, but they certainly have respectable assets and a steady payout at the moment … and Chris Mayer, at least, appears to think that they’re worth your money.

That’s got to be as much Gumshoe as you can stand for one day … so come back tomorrow, I’ve got more stuff brewing and I’ll get to some of those other “paycheck portfolio” firms soon for all the dividend lovers out there.

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