The 424 Dividend Boost — 12% Letter

By Travis Johnson, Stock Gumshoe, December 3, 2008

“While most folks earn tiny 2%-6% dividends on Blue Chips (like Pepsi, Johnson & Johnson, and AT&T) savvy Americans are secretly “boosting” those small yields to dizzying heights – earning incredible 30%-50% on the exact same shares. Originally available only to executives at America’s richest Blue Chip firms, this income secret is now available to regular folks like you and me.”

Sounds pretty nice, eh?

I haven’t written about the ads from Stansberry & Associates too much lately, though they may be the most aggressive marketers out there … but in recent weeks I’ve seen lots of ads for Tom Dyson’s 12% Letter from Stansberry, and had several questions about what they’re calling the “424 Dividend Boost.”

So let’s have a look, shall we?

The ad focuses primarily on this “424 Dividend Boost,” which, as you can imagine, is an entirely invented term, but it also gets into some “private” high dividend yields (those have been disasters — I’ll explain in a moment).

So what is a “424 Dividend Boost?”

Dyson explains that there are only three things you need to do to participate in this “boost”:

  1. Find the firms that offer this “boost” (only 20% do)
  2. Contact them directly
  3. Hold on tight and invest for the long term

Dyson also provides a number of quotes from respected sources to back up his claims …

Wall Street Journal:

“The Best Kept Secret on Wall Street”

“Securities and Exchange commission rules won’t let [these companies] say much about this fabulous way of saving and building wealth… And because brokers, fund managers, and other middleman can’t make any fees or commissions if you buy stocks directly from a company, you won’t hear about the secret from these middlemen.”

and …

“There are millions of people out there who want to do this, they just didn’t know they could”
Ed Middleton, National Association of Investors

So that is intended to convince you that this “boost” is real — and it is, though not perhaps in the immediate way you might imagine from reading the ad.

We get several examples from Dyson to support the incredible claims — the three claims at the top of the ad are as follows:

“Johnson and Johnson:
Current yield: 2.7%
With the “Dividend Boost”: 39%

Current Yield: 5%
With the “Dividend Boost”: 43%

Current Yield: 2.4%
With the “Dividend Boost”: 53%”

And he uses the stories of several individual investors — people who he or his copywriters have met over the years, I assume — to show that these promised returns are real.

“5% “boosted” into 43% — 74-year-old AT&T shareholder David Schaffer is another example. While most shareholders earn the company’s “usual” 5% dividend, Schaffer “boosted” his to an unbelievable 43%! That’s nearly 8-times bigger than normal. So far he’s profited more than $84,000!”

Sounds unbelievable, doesn’t it?

But it is, in part, real …

What’s that? Did I hear a question from the back of the room? Yes, raise your hand, please … mmm hmm, did everyone hear? The question was, “isn’t there a catch?”

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Ah, there’s the rub. Yes, there is a catch.

It’s best described by two words that are anathema to most investors these days: “Time” and “Patience.”

You see, the “424 Dividend Boost” is nothing but another iteration of what Dyson used to call the “801K Plan” — it’s a teaser for investing in Dividend Reinvestment Plans, or DRIPs.

Using this strategy, you could certainly have put down an initial investment a few decades ago in a stock, like Johnson and Johnson or AT&T, and reinvested your dividends, to the point that the dividend you receive today is equivalent to a 40% or even much higher yield on your original investment.

That’s because of two things — raising dividends, and the compounding from dividend reinvestment. Most large American companies that pay dividends try very hard to raise those dividends every year, or at least keep them stable in bad years. That means if you bought shares in Johnson and Johnson back in 1970, for example, you would have received an annual dividend of just under a penny a share. Today, the annual dividend for JNJ is $1.84, so that’s incredible growth right there.

But the real power comes from dividend reinvestment — as those dividends climbed over close to 40 years, you could have turned each one into more fractional shares of JNJ, and the following quarter those fractional shares would have entitled you to slightly more dividend, so each quarter you would both add to your number of shares, and increase the dividend payment on each of those shares, which builds upon itself like compound interest, the force that Albert Einstein is reputed to have said (he almost certainly didn’t) is the most powerful force in the universe.

Just because Einstein probably said nothing about compound interest during his lifetime is no reason to dismiss it, of course — and Dyson does not perpetuate that famous cocktail party quote. It is something that we all know intuitively as investors, described more simply thus: Having your money make money is much more fun than having to make money yourself.

There are a lot of ways to reinvest dividends, of course — you can simply tell your broker to reinvest dividends for you, which many will do at no charge; you can collect the dividend money yourself in your cash account and reinvest it at your leisure, perhaps even choosing each month or each quarter where that money would best be placed, perhaps in the cheapest stocks you own; or you can invest directly through many companies in a direct purchase/ dividend reinvestment program.

Those direct DRIPs are really what is being teased here, and this is the version that is slightly more complicated, or at least cumbersome — the 424 part of the teaser refers to Rule 424 under the Securities Act, which deals with how companies issue prospectuses for selling their shares, though there’s no real reason you’d have to know that (Dyson hasn’t kept that much of a secret, to be fair, he wrote about it in Daily Wealth a couple months ago, and also explained the concept a bit in that article).

DRIP is the term commonly used to refer to programs whereby individual investors can purchase stock directly from the company itself, and let the company hold it and reinvest the dividends into more stock. A lot of large, consistent, dividend paying companies do this (the ones that used to be called “blue chip” or “widows and orphans” stocks before fear drove those terms out of common usage) — including firms like Johnson and Johnson, McDonald’s, Wal-Mart, and hundreds more.

Just about every single DRIP plan is different — some will sell you your initial share to get you started, others require that you already have a single share of stock registered in your name (but will often help you do that). Some charge fees either to get started, or to process monthly purchases if you enroll in an automatic investment plan; and others will give you discounts on the share price or reinvest dividends at a discounted price. Most of them have reasonable minimum investments, anywhere from $100 to $500, or require you to sign up for an ongoing automatic investment program.

So what are the benefits? Well, you get your dividends automatically reinvested, and you can often buy shares less expensively than you would through a full service broker (though some of them are more expensive than a rock-bottom discount broker).

The psychological benefit can be more powerful still: You’re probably not going to watch these shares every day or week (or hour) like you can in your online portfolio at your brokerage, and there are hurdles to selling your shares. Selling in these plans is often a little bit of a hassle, you sometimes have to write the company to sell stock, and they charge you a fee to clear your account — it’s often only $20 or $30, but still, it’s enough to slow you down. That, combined with the fact that it takes a few minutes to set up each plan, discourages investors from trading in and out of these stocks — and trading in and out is what typically punishes average investors, who are excited or scared by the movement of the Dow to buy or sell at precisely the wrong time (on average, that is — I know many of you do much better than that through your various trading strategies). Having this money squirreled away where you’re less likely to touch it means, if you choose the right stocks in the first place, that there is indeed a potential to build some wealth over time.

But remember that bit: Time. No Dividend Reinvestment program is going to make you rich in a matter of years, and these