“The Federal Reserve’s 94-Year ‘Override’ Income Secret—Exposed”

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Apparently the world has royalties on the brain this week … or at least, the part of the world that lives in Florida and has worked for Porter Stansberry. Frank Curzio, who writes from northern Florida, I think, has been pushing for royalty stocks, most recently patent and pharmaceutical royalties, for his expensive Phase 1 Investor letter in a pitch we covered yesterday. And Tom Dyson, who left Stansberry a couple years ago to start up the Palm Beach Letter with Mark Ford, is presumably down in Palm Beach and has recently started touting the “Override Income Secret”.

And the “Override Income” spiel, as you’re probably guessing, is also all about royalties. As with the “Mainz Income” pitch that we’ve seen over the years from Dyson’s prior employer, they get your attention by focusing on some well-known people who get “secret” income … and, exactly as with “Mainz Income,” those folks are all getting their special “Override Income” from book royalties.

As in, they wrote a book and then, as long as the book sells and makes money, they get royalty checks from the publisher.

I can see why they use this example — it plays nicely on any anger you might feel toward Ben Bernanke or the other Federal Reserve governors who are enjoying royalty checks and play the headline role in this Palm Beach Letter pitch…

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… or toward George W. Bush or Barack Obama or Hilary Clinton, who have generally headlined the Mainz Income pitches because of the multi-million-dollar royalties from their memoirs.

And no, you aren’t going to get multimillion dollar secret “Override Income” exactly the way these folks do unless you write a bestselling book or two like they did (or get famous enough to have someone write a book for you), but authorship royalties are a nice clean way to explain the concept of royalties or “Override Income.”

Why? Because you’ve heard of them — you understand that if you write a book or a song you get a chunk of the revenue those works bring in because you own (or owned, and sold to the publisher) the copyright. It makes logical sense.

And the “Override” part comes from the fact that most of these kinds of royalties — at least, the ones like metals, energy, patent or pharmaceutical royalties — are paid off the top line. A straight percentage of sales, in many cases, often without any deductions for operating expenses or unexpected costs or whatever.

So we haven’t yet told you what the secret picks are, and we’ll get to that, but first let’s take a quick look at some of the spiel from the ad …

“The Federal Reserve’s 94-Year ‘Override’ Income Secret—Exposed …

“The men and women of the world’s most powerful institution have been harboring a powerful income secret – one that allows them to collect an extra $6,250 to $23,000 or more each month—on top of their regular salaries and pensions.

“Find out how they do it, and how regular working Americans are beginning to do the same.”

This “Federal Reserve” bit is clearly designed to catch our attention, despite the fact that it has almost nothing to do with the actual investments Dyson is pitching. Here’s a little more:

“In fact, these men and women know so much information… they aren’t allowed to own certain stocks. They can’t buy and sell securities within a seven-day period before policy-setting meetings. And they can’t invest their money in the week leading up to and following a major Federal Reserve announcement.

“But what many of these ‘mega-bankers’ do own—going all the way back to the birth of the Federal Reserve in 1913—is an income stream so lucrative, it has the power to pay them one hundred to one thousand percent of their annual salaries.”

And yes, many of the members of the Board of Governors of the Federal Reserve are quite wealthy, most if not all of them are millionaires, but that’s not surprising — they’re academics, but they work in one of the more lucrative academic fields when it comes to consulting gigs, and they’re at the top of their fields so they’re also in demand as speakers and authors, including textbook authorship, which is likely where most of Bernanke’s royalties are coming from. Janet Yellen, our next Fed Chair, is substantially wealthier than Bernanke, so her royalties on the academic monographs and textbooks she’s published may be less important, but she does get some. And other Fed Governors are authors too, and in a few cases own other assets that could potentially be royalty-connected, including common stocks.

And obviously, in the case of authorship payments like Ben Bernanke’s royalties from the many editions of his macroeconomics and microeconomics textbooks, these aren’t sneaky “secret” payments they receive, they’re earned cash from works they have created. Leading economists might make more than most university professors, and Federal Reserve governors receive a salary of $180,000 a year (or $200,000 for the Chair), which is pretty close to what the average full professor makes at the best research universities, but most of them probably earn far in excess of that salary even before they retire from the Fed and get lucrative consulting gigs with investment banks. $200,000 is a fortune in some places, but I’d say it’s solidly upper-middle class in Washington, DC or downright difficult to live on in Manhattan, so book sales and speaking engagements and savvy investing have helped to make sure that many of the Fed governors have assets well into the multi-millions. That’s not because they know some secret about culling “Override” income, it’s because they’re smart, old, experienced, perhaps lucky, and are the leaders in their field. And, of course, some of them were born into privilege, not terribly unusual for academics.

Even Alan Greenspan, the old “Oracle” who brought celebrity to the role of the Fed Chair (or, if you prefer, “Mr. Bubble”) gets mentioned — his “Override Income” was several million dollars, largely due to his memoir The Age of Turbulence that he published after leaving office (like most such books, a bestseller that I assume fewer than half the purchasers actually read).

But what does this all mean for us?

Well, it means we can ignore the Federal Reserve stuff — just like when it came to “Mainz” income we could ignore the huge book royalties earned by Bush, Clinton and Obama. Those are irrelevant for our purposes.

But it doesn’t mean we have to hate the idea that’s hidden under all of this. I do like royalty-type investments, they’re generally steadier and lower risk, they have huge margins, and they sometimes pay nice dividends. So once we get through all the silliness about how the Fed Governors use this secret “Override” income to get rich, what are the actual investments that Dyson is pitching?

I thought you’d never ask! He is, of course, talking about publicly traded stocks that have something to do with royalties — here’s how he explains it:

“The single easiest way to collect Override Income is through the stock market.

“That way, you don’t have to start a business.

“You don’t have to write a book.

“You don’t have to paint a painting.

“You don’t have to throw on a hard hat and prospect for gold.

“Instead, you can buy an ownership stake in companies that already own valuable assets and properties… and get paid without having to do the work… without the operational risks… and just sit back as the checks start coming in….

The 3 Best Ways to Collect Override Income

“You won’t find many Override Income companies on the stock market. In fact, if you count the Nasdaq and New York Stock Exchange, only 2% of the listed companies qualify….

“Without big buyers, these businesses don’t get much big press, either… which keeps many of these stocks a secret.

“Remember, Override Income:

  • Must be derived from a scarce resource
  • Typically pays out more income
  • And pays you from the “top line.”

But which ones, you ask? We then get into the few clues they’re willing to provide:

“OVERRIDE INCOME Company No. 1 makes money from a key resource. Without it, there would be no steel in the world. These guys are a pure ‘Override’ play. Last year, the company paid out 96.5% of its profits to investors. Talk about profit sharing—that’s incredible! Especially when you consider one of its competitors—a company called Nucor—passed along only 2.8% of their revenues to shareholders.”

So that must be one of the iron ore trusts — there have been several of these trusts over the years, since many iron mines are extremely long-lived and somewhat boring and predictable (though iron ore prices themselves are often volatile, making their payouts volatile), which makes it the perfect kind of asset to drop down or spin out into some kind of trust or partnership.

But which one? Well, the only ones that anyone really likes that are of a reasonable size are Mesabi Trust (MSB) and Labrador Iron Ore Royalty (LIF in Toronto, LIFZF on the pink sheets).

There’s also Great Northern Iron Ore (GNI), but that stock is perhaps the most obvious and easy short sale candidate I’ve ever seen — the company is probably worth a maximum of about $25-30, since that’s as much as you’re likely to get out of it in the next 16 months or so (the trust dissolves in April 2015), but it’s trading at $75. Unfortunately, my broker didn’t find any shares to short when I tried recently, or a year or two ago when I first attempted it (and I haven’t tried all that hard, I’m not very committed to short-selling). And there are other iron ore royalties out there, but most are tied up in other companies (including my favorite non-producing iron ore royalty owned by Altius Minerals, one of my larger holdings).

But if we’re talking about passing through 96.5% of their revenues to shareholders and a reasonably large stock that would be reasonable to recommend to a subscriber list of tens of thousands, that must be Mesabi Trust (MSB) … you can squish the numbers a bunch of different ways, since this is basically just a pass-through entity that pays a few basic corporate expenses for bookkeeping and auditing and a Board of Directors, but Mesabi actually paid out more than their net income as dividends in 2012 and it was about 95.5% the year before (Labrador Iron Ore, which is a royalty company dependent on Iron Ore Corp of Canada, which is in turn controlled by Rio Tinto, has no special special tax status and paid out about 75% of net income in 2012).

Like other trusts, Mesabi is not allowed to do anything — they own the royalty on some mines that are operated by Cliffs (CLF) in Minnesota and they collect that royalty and, as a pass-through entity, they pay it out directly to the shareholders of the trust. The trust remains in existence for 21 years following the death of the longest-living named person in the trust at the time it was formed, a person who I think is in his early 50s now, so they have at least 21 years to exist and perhaps decades more. Assuming the iron holds out. The Northshore mining operations that Mesabi’s royalty comes from have been tricky over the years — they were shut down or slowed down by Cliffs last year because of low iron ore prices and demand but in late October they announced that they’ll be restoring production lines at Northshore, which helped MSB shares jump up a bit. The stock has come down a little since then, so if you think iron ore will be in higher demand next year and prices will be rising or stable MSB will probably work out just fine — the company depends entirely on whatever Cliffs decides to produce and on what the iron prices are at that time, so the dividend is not guaranteed at a particular level — I wouldn’t count on annualizing the last quarterly 51-cent payment and assuming that this really carries an 8.8% yield going forward, but it may weell be be somewhere in that neighborhood or even, if production ramps up early next year, substantially higher. The dividends for 2013 totaled $1.54, 2012 was $2.60 and 2011 was $2.42. After my brief time looking into this I’m finding myself a little more comfortable with Labrador Iron Ore than with Mesabi, given their location and possible expansion, but the dividend is substantially lower (about 5% now, though it might get better tax treatment since it’s a real corporate dividend, not pass-through income).

And, of course, if iron ore prices go back to well below $100/ton, which is where they were forever before the run-up in the commodity bull market of the late 2000s, then buying any of these stocks at today’s prices will end up being a mistake. Steel demand is the big driver, which can come from anywhere, but the biggest demand for steel is in building skyscrapers and urban infrastructure — so if China stops urbanizing, who knows what iron ore prices might do. That said, if I could buy MSB or LIF and short GNI as a paired trade I’d do so in a heartbeat.

What’s the next one?

“OVERRIDE INCOME Company No. 2 makes money from the sale of oil and gas throughout the Panhandle and Gulf. Last year, for every $100 it received, it distributed $95.80 to investors. You can really see the difference when you look at a company like Chevron, which paid out just $3 for every $100 it made. What’s more, as an ‘Override’ company, it’s obligated to pay you money—before almost all other matters, expenses, and interests. That’s why these guys have paid out income every year since they’ve been public. That’s 308 consecutive payments in total.”

Even if this one pays out monthly, which I presume they must, 308 consecutive monthly dividends would mean that the company has been public for 25 years. Which narrows it down considerably — that gets us down to just a few “old” trust candidates including San Juan Basin (SJT), Mesa Royalty Trust (MTR), and Sabine Royalty (SBR). And since Sabine is the only one of those that really matches precisely, and also has all its properties along the Gulf and in the Panhandle (the others are New Mexico and Colorado), we must be getting teased here about Sabine.

Sabine Royalty has been around for about 30 years and publicly traded for more than 25, they do pay a monthly dividend that currently has the trust yielding about 8.5%, and they are a pass-through trust with no real expenses, they just take their royalty checks, pay the accountant to make sure they’re correct, and send the cash to shareholders. Taxes are paid by shareholders like you on the income you receive, like REITs or other tax-advantaged entities, they don’t pay corporate income tax and pass those tax liabilities straight through to you — which is why lots of folks like to hold these kinds of investments in retirement accounts to avoid or delay taxes.

I don’t know a lot about Sabine or their current prospects, but they don’t have a set date for dissolving the trust — the trust will dissolve once their royalties become tiny (less than $2 million per year, I think), so it’s really about figuring out how long-lived their reserves will be and whether more oil will be found or produced on their royalty lands, and figuring out how much that will be worth. The last annual report included their annual update on the reserves by an outside consultant, and that consultant estimated a continuing decline in revenue to about $40 million next year and $37 million in 2015, but if you know what oil and gas prices will be then, well, your guess will probably be better. They are completely passive and completely dependent on others to produce on their lands, and they don’t hedge or anything so they depend on oil and gas prices — which is why their revenue was $90 million in 2008 and $41 million in 2009. 2014? I dunno, but as a non-expert it strikes me as safer and stodgier (in a good way) than the big new trusts from Chesapeake or Sandridge, most of which have much higher annual yields in the 15-25% range and a pretty short expected life. I don’t own any of these, though I do own Dorchester Minerals (DMLP), which is a somewhat more active royalty owner thanks to their MLP status (very gas heavy, hasn’t done well lately).

One more?

“OVERRIDE INCOME Company No. 3 is a rarity among precious metal companies. If you invested in a regular gold, platinum, or silver company, you’d be hard pressed to find one that pays income. But thanks to its unique model, the company we’ve found has the potential to go up by hundreds of percentage points over the next five years… AND it pays regular dividends too. In fact, it’s paid investors every year since 2000—a total of 45 times. Most importantly, it’s paying out three times more money from the “top-line” than its biggest competitors.”

This one, almost certainly, is Royal Gold (RGLD), the big gold royalty owner. Like Franco-Nevada (FNV) or Sandstorm Gold (SAND, which I own), RGLD has gotten clobbered along with the gold price and is looking somewhat inexpensive now for the first time in many years … as long as you think gold won’t keep going down. Like the iron ore trust and the oil and gas trust noted above, this one’s mostly driven by commodity prices — but unlike the others, it’s not a pass-through entity and doesn’t pay a large dividend. OK, the dividend is three times larger than the biggest gold miners pay … but at 1.7% for an annual yield for RGLD that still ain’t saying much.

Royal Gold is an efficient enterprise, a $3 billion company with just 20 or so employees, but it is a business — they don’t just collect money and pass it along, they reinvest it in more royalties … which means that over the years they’ve been buying up royalties in developing projects at substantially higher prices, partly because gold has gotten more expensive and partly because, as they grew, they had to buy bigger and bigger deals to make them meaningful for a larger company. So it has been a spectacular stock over the last ten or 20 years, but whether that continues really depends on the price of gold — they own a royalty on the Voisey’s Bay nickel mine that they acquired when they bought International Royalty a few years back, but their other four “Cornerstone properties” are all big gold mines, and the vast majority of their future revenue will come from these kinds of monster mines.

So … I’m officially out of time and sharing this piece with you nice and late in the day this time, but there you have it — the “override income” secret is that you should own royalties so you can get passively rich, but it is, of course, never so easy as it appears when you first listen to the ad. These are all pretty solid commodity-dependent royalty companies as far as I can tell in my brief examination today, and they may continue to be good long-term performers if their respective commodities (iron, oil and gas, and gold) do well for the decade to come … but they won’t give you huge paydays like Ben Bernanke and Alan Greenspan have enjoyed from their book royalties unless, of course, you make a huge investment in buying shares of these royalty-owning companies.

What do you think? Like these guys, or someone different in the “Override Income” area? Let us know with a comment below.

And those of you who haven't retired yet, check this out as we get to the "planning and forecasting" part of the year...

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10 Responses to “The Federal Reserve’s 94-Year ‘Override’ Income Secret—Exposed”


  1. I think its called “shuffling the deck” and it can drive you crazy if you seriously try and keep track of all the analysts moving to a different tentacle of the octopus. Personally I like Bill Bonner and have read his Daily Reckoning for more years than I care to remember, even corresponded with him a few times and have always found him fair and reasonable, even agreeing with me that some AGORA policies breach the bounds of being ethical.

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  2. Hi Travis, and thanks for all the insight and revelations. Wonderful reading. And I was wondering if you would explain how a paired trade works as in “That said, if I could buy MSB or LIF and short GNI as a paired trade I’d do so in a heartbeat.” How is that likely to make a lot of low risk? money??

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  3. Travis, your ability to make sense (cents?) out of all the smoke and mirrors these guys throw out there is remarkable and also provides very enjoyable reading — thank you. Any quick thoughts about another royalty play — BP Prudhoe Bay Royalty Trust (BPT)?

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  4. Travis, Thanks for your thoughts. I saw an academic study, cant remember where, that if you build a basket of royalty companies(across diverse industries) you are actually are building a bond portfolio with safer risk characteristics (you get paid off of revenues and not profits) and higher yields (just look at yields) Individuals can do this, institutions, hampered by regulation, cant.

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  5. While stock market investors benefited, this did not carry through to the broader economy. The net result is that Large Scale Asset Purchases worsened the gap between high- and low-income households. Indeed, it’s now known to everyone that quantitative easing increases inequality. A rise in stock prices generated by excess reserves may sap, rather than supply, funds needed for economic growth. The money multiplier is 3.1. In 2008, prior to the Fed’s massive expansion of the monetary base, the money multiplier stood at 9.3, meaning that $1 of base supported $9.30 of M2.

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