“Bulletproof Paychecks: Income for Life?”

Mitchell Clark's dividend stocks revealed

By Travis Johnson, Stock Gumshoe, April 12, 2010

I got a lot of questions over the weekend about this latest ad for the Income for Life newsletter from Lombardi Publishing — and the digging I did made me want to call some attention to this teaser as a bit of a cautionary tale …

Mitchell Clark, who feels the need to add “b. comm” after his name to boast that he has an undergraduate business degree, edits this letter and promises in the ad that his favorite stock could “pop to $68 from $28” — and that it will provide you with great, steady income along the way.

The rest of the ad is just a thinly-veiled tease for dividends in general — we see dividends called lots of things, from “plan b pensions” to “monthly paychecks” to “801k plans” in teasers, so seeing them called “bulletproof paychecks” is not terribly shocking.

And it’s not hard to “get your name on the list” for these exclusive “investor paybacks,” of course, all you have to do is buy the stock and you’ll get the dividends.

Most income newsletters have some variation of this tease, and the rush to get in is generally built around the ex-dividend date — as in “you must get in now or you’ll miss this paycheck.” Here’s how the Lombardi folks push this one:

“Your first Bulletproof Paycheck will be mailed to you on May 26, 2010… which means you should click the link below ASAP….

“Sorry for the urgency, but there’s good reason. A big lump of money is at stake.

“For some, it could be $1,400. For others it could be $28,455… or $87,822. For you, it could be enough to double or triple your investment income.

“The money (hundreds of millions of dollars) must be sent! By law!”

And then they overstate the safety of the dividend, as do many folks:

“…you get a never-ending stream of ‘investor paybacks,’ guaranteed money, like clockwork — just for getting your name on the list”

A dividend, of course, is only guaranteed to the extent that the company makes a profit and decides to send you money. Many companies have strong dividend policies, and most companies, at least in North America, are loath to cut their dividend, but that is a long way away from a “guarantee” — if you want a guarantee that a company will pay you a particular amount of money, you’ll have to lend them money (ie, buy a corporate bond), not just buy a piece of the company… and even then, the guarantee still depends on the company’s solvency. Or deposit money in their bank, if you’re happy with a .01% return on your savings account.

So that’s my quick bloviation about dividends and all of these promises about “guaranteed income” — don’t get me wrong, I’m all for dividends, and dividend growth companies have historically been among the most powerful long-term investments in the world.

But that doesn’t mean this ad smells any better — because although they’re sending it out now (the ad went out at least as recently as Saturday to many of my readers) with promises of a great Canadian bank that they’ve identified for you, the teased stock is getting the aroma of last year’s fish.

Here’s how they tease this particular stock:

“Looks like a loser, until you look closer

“I’m telling Income for Life members to buy a stock that looks bad at first glance, on two levels.
1) The stock was battered last year; and
2) It’s a bank.

“Most investors will look at those two points, then quickly turn and run away. They’re wrong!

“Sure, the banking industry is still a mess. But look closer and you see my pick is a Canadian bank. Subprime mortgages? Not in Canada. Toxic assets? Not on the books.”

Which is all well and good — lots of folks have been urging you to invest in Canadian banks as they’ve suffered alongside their often-riskier US brothers. Then we get into the shifty bit …

“Do nothing and let the company send the money directly to you

“This company’s stock did ‘okay’ in 2009 and it has been rising in 2010. However, the payback checks ARE guaranteed. They’re Bulletproof Paychecks made out to you!

“That’s the primary reason I’m recommending this stock. Another reason: you could collect steady bulletproof paychecks as your nest egg gets much bigger.

“Could pop to $68 from $28

“This is a $68 stock selling for about $28. All the company has to do is return to its proper valuation and boom — a $20,000 investment soars to more than $48,500.00.

“A return to normal should be relatively easy for this outfit. That’s because, hidden under the avalanche of negative headlines about banking and the financial sector is this critical fact:

“Canadian banks are not now and were never overloaded with subprime-mortgages; their assets are not toxic.

“Business is strong. Revenue exceeds $16 billion. And their cash flow exceeds $2.3 billion. Sure, it got battered in 2008 like all other banks, but it never broke. Business is so strong this company is attracting hardcore value investors — big players who aren’t even concerned with income. They want the stock just because it looks like it will go up in price.”

OK, so there are a few tiny tricks in there — as in adding the decimal point and zeroes for your “after” investment so it looks even larger than the “before” investment, and again making that “guaranteed” claim without caveat.

And a bit more to show that they’ve looked at the numbers:

“Pays twice what any two in their industry pay combined!

“The company paid about $1.4 billion to investors in 2009 — and all this “payback” cash was sent out during the historically worst economy anyone has seen in 75 years.

“With a market cap in excess of $13 billion, this is no small-fry outfit. Their annual revenue tops $16 billion and net income exceeds $2.37 billion.

“Remember, this company has been sending bulletproof paychecks to investors like you for 181 years, since 1829. It was founded in 1817 and it still goes by the same name. So on a scale of one to 10, this firm’s strength, stability, and reliability rate an over-the-top 11.

“Another indicator of safety and stability: Institutions own a whopping 56.80% of its shares. Estimated earnings per share: a healthy $4.68.”

But the big trick? That’s a bit more dastardly — they say that it’s a $68 stock selling for $28, and that it’s already done “okay” in 2009 and early 2010 (which is true).

Why dastardly? Because this stock is clearly Bank of Montreal (BMO) … and if you’re going to update your ad with that “done okay” into 2010 bit and the other more up-to-date numbers, you really ought to stop promising huge capital gains from a $28 share price, because the stock hasn’t been that low for a year. BMO is currently trading around $60.

Why am I sure he’s teasing BMO, despite the misleading “$28 to $68” move that would require a time machine? Most of the clues match nicely, though sometimes to current numbers and sometimes to year-old numbers, but BMO is the only Canadian bank that was founded in 1817 and started paying consistent dividends in 1829. It was, in case you’re curious, at $28 almost exactly a year ago (it fell as low as $20 or so in the March 2008 collapse) and the all time high for the stock was, you guessed it, pretty close to $68 — it got up to $67 and change in the summer of 2007.

And yes, their “bulletproof paycheck” is due on May 26 — that’s the day they’ll send out their next quarterly dividend payment this year … the record date is May 3, so you’d have to be an owner by then if you want the 70 cents (Canadian).

The other angle used by most income newsletters is a casual ignorance of the shareholding that most of their readers would be capable of picking up — to get a payment of “$1,400… $28,455… or $87,822” as they tease near the top of the letter, you’d have to own 2,000… or 40,000… or 125,000 shares, which at $60 a pop would cost you $120,000 … or $2.4 million… or $7.5 million. Getting a payment of $1,400 doesn’t sound quite so sexy if they say that you have to invest $120,000 first … which is, of course, why they don’t mention the investment amount when they conjure up images of fat future paychecks.

If you’re Joe Investor and you pick up 100 shares for $6,000 or so, your first quarterly dividend would be for about $70 … or, if you’re reinvesting dividends to compound your investment as most “accumulation stage” investors should (meaning, you don’t need the live off the income yet), you’ll add about one more share to your pile each quarter (assuming the stock price and the dividend amount both stay at about this level, though the hope, obviously, is that both go up over time). That’s nothing to sneeze at, and it does add up over time if you pick the right companies … but it’s nothing to salivate over, either, which probably makes it a hard sell for a newsletter ad copywriter.

So … I could dig into this one quite a bit more, but we’re all short on time in this busy world — how about just one more nitpick?

“Institutions own a whopping 56.8% of its shares…”

Really? Having institutions own just over half of the stock means the company is probably actually under-owned by institutions, that’s somewhere between “small” and “average” for institutional shareholdings in a large cap stock. I don’t know where Canadian banks generally stand on this continuum, but Bank of America is also at about 56%, on the low side for them historically, and for the extremes Citi is down around 35% (that’s now a low-priced stock that’s frenetically traded) and JP Morgan and Wells Fargo are both at about 75% institutional ownership.

So today’s cautionary tale? Promising that a stock will go from $28 to $68 is a lot easier if it has already risen to $61, as BMO has over the past year. I suspect the ad is about a year old, which would mean I’d have to give them some credit for having touted BMO a year ago … but really, you only get the credit if you then update your teaser and justify buying BMO at today’s price, not at the beaten-down price that we all now know, in retrospect, was a great opportunity.

Many folks bet the other way on BMO, including the well-publicized bet by Dan Amoss that they’d cut their dividend last August and that the stock would collapse (it didn’t, and BMO went up nicely after that prediction that I wrote about, and that Stock Gumshoe got a moment in the sun from Bloomberg for noting).

Right now, BMO has recovered substantially and is hoping to get back to their ~50% payout ratio (as in, pay out half of earnings as a dividend) — for a little while last year they were paying out more than they earned, and in the end the 2009 ratio was higher than 90%, but the earnings rose and by the fourth quarter it was getting close, just over 63%, so the dividend might not rise anytime soon but it does sound quite safe. At the current price, BMO yields about 4% — a little more than most of the Canadian banks, but not very far out of line. If you want to dig into the Canadian bank stocks in general, Barron’s had a good article touting them (including BMO) back in November, and a nice update just this past weekend.

Now it’s your turn: let us know how you feel about the big bankers to the North by sharing a comment, you’ll find the friendly little comment box just a few inches to the South …


rick
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rick
April 12, 2010 6:35 pm
I like this company. They own Harris Bank, a Chicago stable institution where I bank. When I talked about their situation to my banker a year ago, he said they had no problem, because they were "owned by a conservative Canadian institution" (BMO) and had learned a few years before about the real estate bust, "which happened in Canada a few years ago." When I saw that they were paying a nice dividend (6% at the time) it seemed a no-brainer. They've done great since then, which a lot of good companies have over the past year, but the dividend… Read more »
Robert
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Robert
April 12, 2010 6:39 pm

Great job as usual exposing the marketing chicanery.

Bobw
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Bobw
April 12, 2010 7:35 pm

Just wondering, does Canada withhold 15% of the dividend as the do for the Royalty Trusts?

Hernandos Hideaway
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Hernandos Hideaway
April 12, 2010 8:33 pm

Bobw, I ownBMO in a Schwab IRA account. They do not withold the 15% Canadian tax on this stock as they do on my Canadian TrustsEnter text right here!

Janice
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Janice
April 13, 2010 4:06 am

FYI 0.70 CAD = 0.696620 USD today

Farmer John
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Farmer John
April 13, 2010 8:38 pm
This is a repeat comment, but I've been invested in AOD for a couple years and they pay a nice dividend monthly. Recently (and actually) I read their entire prospectus and annual report, after which I put in an order to buy more. Also, this a change of topic, but if you can spare moment, Travis, I have question about Hecla Mining. I've commented on the company before in this forum, and I live in an area where the Company is currently exploring. I notice that the Jan 21 2012 PUTS at $2.50 I was able sell during the last… Read more »
ayub
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ayub
April 13, 2010 8:45 pm

Anyone have insights on Tom Dyson’s 424 Dividend Boost hels been teasing?

bookumdanno
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bookumdanno
April 18, 2010 11:45 am

as i recall they had a trader in there a couple of years ago that lost a few hundred million
here is a recent articlehttp://www.businessweek.com/news/2010-03-19/bmo-s

who knows how that'll wind up

Jason
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Jason
July 14, 2010 1:54 pm

The most insidious thing about this teaser is that it *could* be designed to look like they called it correctly a year ago and just haven't updated their ad.

"Whoops, silly us, sorry about that, but look, we called this one right last year, subscribe and you'll get more solid advice like this the *first* time around."

Of course, never ascribe to maliciousness what can be explained by incompetence and all that. When it comes to my money, the line between the two becomes a lot finer.

Andrew
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April 18, 2010 2:13 pm
Selling puts can be a good way to get stocks cheaper than anyone else and get paid to wait until the puts you sold are exercised. One potential issue would be that by selling naked puts you have no protection if the stock were to drop more than you think, like to below $1. The stock would be put to you at $5 and you'd have a sizable loss, minus the premium you collected. You could always sell a vertical spread as a way to limit your loss instead. And finally one motivation for someone buying these puts could be… Read more »
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