This teaser comes in from Paul Tracy at the StreetAuthority family of newsletters, it’s for their High-Yield Investing newsletter that’s edited by Carla Pasternak … and, as so many newsletters do, they’ve taken a fairly commonplace investing strategy and given it a fake and mysterious name.
Is that enough to get you to sign up for their newsletter? Well, if so, it ought to be enough to get you to read a few more paragraphs here, because I’m sure I can explain this “SD-Cap Authorization Pin” for you … or at least, tell you what they’re really talking about when they tease that we can get stock “on the house.”
Here’s how they tease the idea:
“Locked Away In the Dusty File Cabinets of a Small Circle of Companies There Exists a 40-Year Old, Accounting Loophole Allowing YOU to Grab…
“Stock… “On The House”
“Revealed: Immediately After Reading This Letter, Simply Punch in a 10-Digit “SD-Cap Authorization Pin” & Get Handed Shares To the World’s Most Profitable Companies…
“On Somebody Else’s Tab!”
Sounds nice, right? Now, I don’t need that free stock, personally, because I just got an email that told me I’ve won the International Lottery … but for you, dear readers, I’ll continue to dig in to this one …
“3 Companies Are Prepared To Pay You $959 a Month to Take These Free Shares Off Their Hands!”
That’s right — we’re being teased not just with the idea of this free stock, but with three specific companies that will hand it to you … nice, no?
The ad essentially says that if you have the right 10-digit “SD-Cap Authorization Pin” you can demand free stock from corporations.
Which is, of course, mostly hoooey — but there is just enough truth underneath it to get away with the claim (they temper that claim a bit later in the letter, when all but the most vigilant Gumshoes have given up on reading).
And as we almost see, they run through the stories of several ordinary folks who built fortunes, or retired early, or rescued their retirement dreams, using this “SD-Cap Authorization Pin” to “quickly amass” shares of blue chip companies — and bank big quarterly payouts to boot.
So what the heck are they talking about?
Well, I hate to be the one to tell you this … but this is an old strategy we’ve looked at many times before. In simple terms, it’s just the concept of dividend reinvestment … but because there are a good number of companies that sell their stock directly to investors, and some of them will give you a small discount for reinvesting your dividends through their plans, there is a chance that you can get some small amount of stock “free.”
These are usually called DRIPs (Dividend Reinvestment Plans) or sometimes DSPPs (Direct Stock Purchase Plans), and probably about a third of the larger companies you’ve heard of offer them. We often see this concept teased– I’ve written about it when was teased as the “801k plan,” and it has more recently been pitched as the “One Share Millionaire” plan.
Why? Well, because lots of folks haven’t heard about them — and companies aren’t allowed to (and probably wouldn’t really try to anyway) market their direct sales programs, so that creates a light veneer of mystery that might be just enough to get you to sign up for a newsletter.
But that doesn’t make them magic. These plans, which I’ll call DRIPs for simplicity’s sake, essentially involve you buying at least a single share of some company that you consider to be a “blue chip” stock that you’d like to hold forever, preferably one that you think has the potential for a growing dividend in the years to come. Then you tell them to reinvest your dividends, and each reinvested dividend buys more shares, compounding the total investment over time.
Paul Tracy even pulls out the old Albert Einstein quote that he almost certainly never actually uttered — in this case, he claims that Einstein called compound interest the “eighth wonder of the world” … that’s a new one for me, I’ve heard the attribution that he called it the “most powerful force in the universe,” which is more contextually interesting but also very likely apocryphal.
Whether or not Einstein really thought about dividends and interest is, of course, immaterial — compounding and, indeed, dividends in general are powerful forces in determining your investing returns. It’s simple math — the reinvested dividends create a larger shareholding, which means the next dividend will be larger (assuming they don’t cut the dividend), and it keeps building ad infinitum.
But it does take time — there are probably folks who started out with 100 shares of Johnson and Johnson 40 years ago and now get more cash from each quarterly dividend than they had originally invested, but there’s no substitute for that long time of compounding that builds your wealth, which can be a tough sell in a world where instant options trading millions are teased every day, so they have to stretch the facts a bit and claim that you’re getting “free” shares in order to get your attention. Patience and long-term compounding of your investments are rarely inspiring enough to get you to urgently sign up for a newsletter subscription.
So … how do you find these shares? You can buy directly from any number of companies, most of them will have some kind of entry for DRIP, DSPP, share purchase, or something similarly worded on the investor relations part of their website — but they also almost all use one of the relatively few large firms that manage these programs, so you can start out with those firms to get listings and ideas. A few that might be reasonable places to begin perusing lists of the available DSPP and DRIP programs are BNY Mellon, American Stock Transfer and Trust, and Computershare. There’s also a blogger who has put together a listing of Canadian firms that offer DRIPs, and if you’re looking to read up on these plans there are many useful resources freely available, including DRIPInvesting.org and DRIP Central, among many others.
The hassle of these plans is that you need a separate one for each company, so you have to enter into that agreement with each company you want to own shares of, and you need to check each company’s policies because they’re all different. Some charge fees for these investments or have stiff minimums, and others offer discounts of up to a few percentage points, particularly if you reinvest the dividends, or will pay the fees for you (thus saving you on brokerage commissions) … and some will do it all electronically, while others require you to fill out forms. Also note that keeping track of all the dividend reinvestments yourself, if they don’t offer this recordkeeping for you, can build into a bit of a tax headache over the years, and most of them will charge you a sometimes significant fee to sell shares (not usually a huge fee, but it could be a shock to those who are used to getting $5 commissions from a regular broker).
That’s not to say these plans are worthless — to the contrary, if you pick the right company they can be a relatively painless way to build wealth over decades, particularly if you’re otherwise the kind of person who would have been tempted to trade in and out of a stock like McDonalds over the past 20 years. Having them tied up in these plans keeps you from seeing the shares in your brokerage account every day and getting tempted to sell them to buy the next hot option tip, they just sit there and — assuming you really did pick a decent stock — they build and build and build without you watching.
Then again, I imagine Enron probably had a direct stock investment plan, too, so it’s reasonable to be careful … and the important thing is not the “secret” that you can buy stock directly from companies, the power of this strategy is the dividend reinvestment, which you can do in any brokerage account, often without a fee. So it’s certainly much easier, if you’ve got the discipline and don’t feel like managing a bunch of different accounts, to just buy your “blue chip” stocks in a regular discount brokerage account, let them reinvest the dividends, and let the position build. Or, if you’re a relatively small investor and like the “automatic” part of the DRIP concept and the idea of investing a set amount in each stock per month (meaning you can buy fractional shares — ie, you invest $25 per month in JNJ even though the share price is $60,) there are other services available like Sharebuilder, which will let you make small, regular investments (for a fee) in a number of stocks to help you get diversification from the very beginning, sort of like a managed DRIP service for whatever portfolio of stocks you select (if your account is very small, the fees might seem a bit high at the beginning — this isn’t an endorsement, just an FYI.
But though I’ve already blathered on for what seems like hours I do have more to share — Tracy also tells us that he has three ideas for these “SD-CAP Authorization Codes” … or, in my words, three stocks that would be a good idea for dividend reinvestment right now. And no, you don’t actually need any kind of authorization code or PIN to find these companies or plans that I can find, so you can probably just ignore that concept — the number probably actually exists somewhere as an identifier for these plans, but as far as I can tell, any emphasis on it is just StreetAuthority’s marketing ploy — these plans are not advertised, but nor are they kept intentionally secret or restricted to specific “in the know” people, and I think they’re as open to any investor as any regular brokerage account would be (I’ve never actually enrolled in one of these, but they look pretty straightforward).
So what are the three specific stocks that Tracy and Pasternak think would be good buys for your DRIP investing money? Back to their words:
“If you know which companies not only have a ‘SD-Cap Authorization Pin’ but are also primed to soar, you can make a killing right now in the markets.
“I’ve identified 3 such companies and the time to strike is now.
“They will all give you free and discounted shares the minute you know the right 10-digit access code. I’ll tell you where to go to enter it in and how to claim your stake.
“Let’s look to your future right now!”
Now … about that first company?
“The first company I will reveal to you is a big player in the natural gas, oil and petrochemical industry.
“It controls over 35,000 miles of pipeline. For reference that equates to more square mileage than Maryland, Hawaii, New Jersey, and Delaware combined.
“And it’s in pristine economic condition.
“In fact, over the last 44 quarters (11 years) this energy titan has not lowered its dividend payout even one time….
“And with each 20 shares your dividends buy… you get free stock.
“But if 20 shares is too much for you at first (this stock is trading in the mid to upper $20s right now), you will still get a 5% discount on stock purchased….
“This company has its eye on the future. As our nation continues to look past the oil age into alternative energies it’s imperative that an energy company stay on the cusp of this revolution.
“Currently our nation uses oil and coal for 62% of its energy needs… natural gas is sitting at only 23%.
“But the political and economic climates are dictating that we will move more towards natural gas as a solution….
“And this company, realizing this upcoming trend, is staying ahead of the game. It’s putting a great deal of its focus into this natural resource goldmine.
“Quietly over the last few years it’s increased its production capacity by 46%…
“But not content to rest on such stunning, record-breaking progress, it pushed the envelope even further.
“Just recently it secured the technology to increase its daily production capacity by an additional 34% allowing it to quickly and covertly become one of the big players.”
So who is that? I’ll wager that it’s Enterprise Products Partners (EPD), which owns about 35,000 miles of pipeline and is also merging with Teppco to get even bigger. They do offer at 5% discount for repurchasing shares, and they have raised the payout every quarter for five years. This is certainly one of the “blue chips” in the MLP energy transport sector, and may be the largest one after their merger, and it currently yields a little under 8%, fairly typical for the sector. Not everyone’s eager to handle the K-1 and IRA-unfriendly reporting headaches of MLPs (FYI: there are also always the somewhat similar LLC affiliates of the pipeline MLPs, the only ones I know of are Kinder Morgan (KMR is the non-MLP, KMP is the MLP) and Enbridge (EEQ is the non-MLP, EEP is the MLP)). EPD’s DRIP plan info is here.
And the other stocks?
“A 1091% Return Awaits You in Chicago!
“The second company I’ll share with you today will allow you to capitalize on the economic downturn.
“It’s common sense that in the markets you’ll often find the biggest rewards by going against the grain.
“When you adapt a contrarian philosophy, you can fast track your wealth by getting in before the herd jumps into an investment.
“And right now I’ve found an opportunity to reap serious wealth by taking advantage of the most downtrodden industry… real estate.
“Now obviously you have to be very careful if you are going to venture into stocks that are real estate driven, but I believe this REIT (Real Estate Investment Trust), I’ve uncovered in Chicago fits the bill.
“Now you and I both know the days of the ol’ real estate boom are well in our rear view mirror.
“Lending restrictions have made it significantly more difficult for individuals to secure mortgages nowadays.
“The death of zero down and subprime mortgages from private lenders has created a great opportunity to make money off of companies primed to take advantage of the ever growing, massive shift from home ownership to home rental.
“Which is why I love this REIT so much.
“It controls over 579 properties consisting of over 152,000 multi-family units covering 24 states.”
This would pretty much have to be Equity Residential (EQR), which is an apartment building REIT that did recently own all or part of 579 properties in 24 states (and here in DC, land of the disenfranchised), though they’ve apparently since sold some properties (their website now lists it as “more than 550” in 23 states plus DC. They do not, however, currently claim to offer that 5% discount — at least they don’t take credit for doing so on their website, though it’s possible that they discount dividend reinvestments anyway. It’s also possible that there’s another Chicago REIT with the same number of buildings and same size footprint, but it seems quite unlikely. Their plan is here, FYI.
And one more?
“Are you worried that inflation may make every dollar you’ve earned turn into 15 cents?
“In an attempt to resuscitate our nation from the drawn out, economic downturn, our government has spent the equivalent of $42,000 for each man, woman, and child in our country on Stimulus Programs.
“Now unlike the “SD-Cap Authorization Pin” I’ve revealed to you, these spending programs won’t make you rich. Instead they may very well expose your money to serious inflation.
“Right now you can get your hands on a security that will adjust the monthly payouts it delivers you to compensate for any inflation that may affect the US economy.
“And because what the company invests in is backed by the U.S. Government, the payment is 100% guaranteed.
“It’s so safe, it makes investing in regular Treasury Bills look like a game of Russian Roulette.
“Yes, that safe!
“You can’t put a price on that kind of peace of mind. But if you fear a future of inflation just over the horizon you will absolutely not want to delay getting your hands on this security because regarding this investment…
“Obviously when you are dealing with an investment that focuses on securities that carry ZERO-risk you have to account for some trade off in payout, but in actuality it has delivered quite a sizable return over the last few years.
“And it only gets better when you know this company’s 10-digit “SD-Cap Authorization Pin” and especially how to put it to work.
“Implementing it into this investment would have handed you a 43% return over the last 5 years.
“An excellent and profitable hedge play to ensure your wealth is safe and secure from the perils of an unknown future.”
I actually have no idea what this is — from that description it sounds like it ought to be one of the relatively few closed-end funds that invest primarily in Treasury Inflation Protected Securities (TIPS), but I don’t think any of them offer direct purchase or reinvestment plans (you can reinvest dividends, but not buy them direct from the fund company). Though frankly, if you want to reinvest dividends from a fund that owns TIPS it would be much cheaper and more efficient to do so through an open-ended mutual fund like the very low-cost TIPS funds offered by Vanguard — though those funds will also provide less monthly income, and usually take less risk. The closed-end funds that I know that pay relatively high distributions and are heavily invested in TIPS are all from Claymore and Western Asset — IMF, WIW, and WIA. Each boosts returns by using leverage (borrowing money) and by owning only about 80% TIPS and buying other possibly high-yielding stuff with the balance. This could be a tease for some other type of investment — there are plenty of stocks and funds that try to raise their dividends, and several different kinds of companies that invest at least partially in US Government-backed securities (including virtually any broad closed end bond fund, mortgage REITs like Annaly or Hatteras, among others — Annaly does have a DRIP, just FYI).
So … to a limited extent you can get “on the house” shares — if by “on the house” you mean that you can get shares instead of cash as dividends, or if you consider a discount of up to 5% to mean something is “free.” I know that many of my readers use dividend reinvestment as part of their long-term wealth-building strategy — but I also know that some of you have told me in the past how much of a recordkeeping hassle the direct-from-the-company DRIP investing strategy can be. Either way, feel free to let us know if you’ve got anything to add — or if you’ve got any guesses about what that third investment might be, since I certainly am not sure about my guess on that one, or anything to say about Enterprise Produts Partners or Equity Residential, or any other favorite dividend stocks you’d like to share. That’s what that little comment box below is for, use it as you like!
And if you’ve ever subscribed to Pasternak’s High-Yield Investing, please click here to review it for us and tell your fellow investors what you thought — delight or dud? We want to know!
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