“Black Market Income” from the 12% Letter?

A couple variations on this teaser about “black market income” have been rolling around the marketplace for months now — the actual investments are still relatively normal, mainstream-ish companies and strategies, just as they were when the 12% Letter called parts of this “black market income” strategy by other names, which is why I haven’t gone through and written about them recently.

But the questions from readers are piling in, so I thought I should share some of the truth behind the “black market income” website from Dan Ferris and the 12% Letter, and explain a little bit about what those income “loopholes” are that the ad talks about.

It’s a long ad, and they tease a bunch of “loopholes” in their “black market income” strategy, so I’ll be brief with each one. But just to make sure you’re revved up and in the mood, let’s get a little taste of the teaser’s lead-in first:

“A Secret Website Wall Street Doesn’t Want Anyone Over Age 55 Logging Onto

“Because it could help you collect as much as $653 in extra income every single week, for the rest of your life…

“Without touching regular investments… and Without going through brokers and money managers ever again!”

So … the “secret website” is their own Black Market Income site, of course, and I haven’t seen it … but they do go on to hint about what a bunch of these “loopholes” are that allow you to collect this special super top-secret income …

“Well, quite simply, the website exposes several ways to completely avoid stock brokers and money managers… And potentially collect thousands of dollars a month in extra retirement income.

“In other words, you could cut Wall Street out of the picture almost completely!

“According to Dow Jones, angry brokers have lobbied Congress to restrict the advertising of some of these income ‘loopholes.’ They’ve made sure you don’t hear of these unique opportunities… so they can protect their own interests.

“As MarketWatch recently reported: ‘Brokers and money managers won’t tell you the ‘best-kept secret’ and they’ve made sure Congress and the SEC keep it a secret too.’

“The American University School of Business put out an academic paper about how the SEC restricts advertising of one of these ‘loopholes.’

“And The Wall Street Journal reports: ‘Because brokers, fund managers, and other middleman can’t make any fees or commissions… you won’t hear about the secret from these middlemen.'”

So let’s run down these “loopholes” that they say will let you collect black market income — the first one is called the “Dividend Boost” …

“Why Brokers Won’t Tell You About the #1 Way to Build Wealth

“Most people don’t know this… But there’s a corporate ‘loophole’ that lets you collect $5,000… $10,000… even $30,000 or more in extra income… Starting with just $25.

“You don’t have to go through a Wall Street stock exchange. And you’ll never have to pay huge fees and commissions to brokers ever again.

“As the secret website reveals, there’s a group of profitable U.S. companies that could pay you 5 to 10 TIMES bigger dividends than normal – over a period of time – if you avoid your broker… and use a route outside the regular stock exchange.”

Well, this is just our old friend the dividend reinvestment plan, or DRIP — many of you have probably heard of this, and this is the one that those quotes from Marketwatch and the Wall Street Journal refer to above. This same newsletter has used the DRIP plan as the core of their marketing pitch for years now, calling it things like the “801k Plan” and the “424 Dividend Boost,” among other things, and I’ve written about it dozens of times … I’d argue that in a world of discount brokers who will reinvest your dividends for free and keep fees low, there’s little inducement to use a traditional DRIP, but they do still exist and they have their place.

DRIP investing basically means that you buy your stock straight from the company, or from the company’s transfer agent (firms like Computershare or AmStock or BNY Mellon). Some of these plans require you to own a single share in your name already, some will facilitate buying that first share — the SEC loosened the rules about this 15 years ago, so companies can sell you your first share now, but before that you had to jump through more hoops. Then you usually set up a plan to invest a certain amount in the stock every quarter or year or whatever, and the company will automatically reinvest your dividends for free. Sometimes they’ll even give you a small discount on dividend reinvestments, though that seems to be very rare now. And unfortunately, there are also more and more companies who charge small fees for buying shares or similar services, so the advantage over a discount broker gets even smaller. Companies like it, I suppose, because DRIP investors tend to be very long-term investors who don’t sell, so they get a fairly stable investor base of small investors.

Pros? You have your money tied up to some degree (not really tied up in most cases, but you can’t sell a stock and do something else with the money in five minutes) and it’s a little tougher to trade the shares you hold in a DRIP, so it’s hard to change your mind and swing it around to a different hot investment every week … and you’re perhaps more likely to let it sit and compound (this becomes a con, of course, if you select the wrong stock). This is a “Pro” mostly for folks who know they should be buying dividend stocks and letting the investment compound, but who can’t stop themselves from trading in and out of more exciting ideas.

And yes, you do get to avoid broker’s fees, and commissions (though there are often some commission-like fees in a DRIP, depends on the company and transfer agent). This can be a huge advantage if you’re someone using a traditional, high-cost “investment manager” type of broker who charges you a fee of 1-2% of your portfolio every years or who charges very high commissions (if you’ve never enjoyed the rarefied air of a full-service broker, commissions of $50-100 are not unusual, compared to more typically $5-10 for a discount broker). But you could basically make the same argument for discount brokers vs. full service brokers — yes, if you’re just buying a bunch of dividend-growth blue chips and reinvesting the dividends and choosing the companies on your own, you’d be silly to pay a full service broker for that … but whether you use a discount broker or a DRIP plan is far less of an easy call to make. Full service brokers should be providing you with a lot more advice and service than a DRIP or a discount broker would, of course.

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Cons? For active investors who want to monitor pricing carefully and act accordingly, you can’t choose the price at which you buy shares — you’re locked into a schedule of dollar cost averaging (that is, of course, a “Pro” for probably more of us — even if we don’t want to admit it).

More importantly, as a DRIP investor you have to keep track of the plan yourself, not all DRIP plans will track your reinvestments and cost basis the way even most discount brokers will, so tax reporting can be confusing. And you would have separate plans for separate companies, creating additional paperwork and consuming additional time — that irritation has improved somewhat with online DRIP enrollment and management through the big transfer agencies like those I noted above, but it’s still more complex than just placing a buy order at Scottrade or Fidelity or TD Ameritrade and telling them to automatically reinvest your dividends (those brokers are just examples, there are dozens more).

And yes, these plans are somewhat “secret” — but that’s only really because companies aren’t allowed to solicit DRIP investors, which would mean they’d have to be acting as brokers for themselves, which would get a bit sticky and probably scare their lawyers, anyway (and I suppose it’s true that the traditional brokers don’t want the competition, so they might push back on further liberalization). Even if they weren’t “secret,” though, it’s hard to imagine McDonald’s advertising their shares when they could be advertising cheeseburgers or frozen lemonade — established companies are trying to market themselves primarily to customers, not to shareholders, so that’s probably where their promotional money would go in any case.

If you’re interested in those quotes that were in the teaser, they are a bit stale — the one from Marketwatch is from a Paul Farrell column and, like Ferris, he sets up the full service brokers and annual fees as a straw man instead of more fairly comparing DRIPs to discount brokerage accounts. And the Wall Street Journal quote was from … a different version of that Paul Farrell column that appeared in the WSJ instead of on the Marketwatch site, at about the same time. There have been several academic studies on DRIP investing and on why companies do or don’t offer these plans, but I’m not aware of any particularly recent or groundbreaking ones as it pert