George Leong at Lombardi is pushing an ad these days for a service he’s calling Automated Income, which recommends something he calls “Sponsored Retirement Plans” (SRPs).
The basic gist is not a huge surprise — this is very similar to past teases by various newsletters about the “secret” way you can make more than Social Security without dealing with brokers or “Wall Street”… and most of these types of ads include examples of “regular folks” who used these SRPs to become millionaires.
It’s not surprising that newsletters continue to push these plans — they’re generally pretty sensible (though not secret, and they don’t require a newsletter’s help), they have tended to work well over long periods of time, and there have been some nice fortunes assembled using similar strategies… We’ve seen teases that refer to the same basic strategy that called them “801(k) plans,” “$1.10 a day retirement plans,” “424 Dividend Boost” plans, “Black Market Income” and “IRM(72)”, among many others.
Here’s a little bit of the intro from Lombardi, to give you a taste:
“Congress restricts over 1,100 companies from advertising these plans. Yet they’re legal and could pay up to 10 times more than Social Security.
“See how everyday folks, retirees, even widows have become millionaires from SRP accounts…and how to get your own plan started now….
“A select group of Americans are retiring with a little-known retirement plan that’s censored by Congress…
“Yet this plan enables Americans to potentially collect anywhere between $1,166 and $12,160 in monthly income that’s sponsored entirely by large-cap American companies.”
Sounds compelling, right? Maybe not as easy as the just-as-misleading “piggyback on Canada’s social security” pitch that we saw a lot of last year, but similarly enticing…. particularly for those who are on the doorstep of retirement but haven’t saved enough money to support they lifestyle they’d like to have in their “golden years.”
So what is it that he’s talking about? A profitable but censored retirement plan?
Well, I hate to be the one to tell you, but it’s just DRIPs — Dividend Reinvestment Plans, specifically those that you can enroll in “directly” with a company through what are also called Direct Stock Purchase Plans (DSPPs).
These kinds of direct-purchase offerings were quite powerful 20 or 30 years ago, when discount brokerages were not the norm and the high minimum balances and high commissions of regular brokers made it difficult for small individual investors to invest in their favorite blue chip companies. And yes, they are “censored” in that companies (McDonald’s, Coca Cola, etc.) are not allowed to advertise or promote their direct purchase plans — whether that censorship is designed to protect broker commissions or to protect investors from misleading marketing, I don’t know.
DRIP/DSPP plans certainly exist and work, and you can open them with many of the best companies in the country. They are direct accounts offered by many individual companies that allow you to buy stock directly from the company on a set schedule (ie, $25 or $100 a month, for example), and to reinvest your dividends automatically. But on the whole, they do not offer anything dramatically different than you would get by buying the same company stock from a discount broker — many people do still recommend them, and they can be a valuable part of some investing strategies, but similar performance is certainly available by using low cost or free brokerage accounts.
DRIP plans from individual companies occasionally offer a slight discount (though that’s becoming less common, and they sometimes also charge fees), dollar cost averaging, partial share purchases, investing discipline, and automatic reinvestment of dividends. This last bit, in particular, was revolutionary in the 1960s when brokerage accounts were uncommon and commissions high.
Today, in my opinion, you can easily do much the same thing through most discount brokers with easier bookkeeping and management, though of course it all depends on your specific circumstances, preferences, account size, and goals.
Essentially, this is how the process works for both a DRIP plan and a standard brokerage-managed dividend reinvestment plan:
For the DRIP/SRP strategy:
- Buy one share of a company’s stock, you might have to get the actual certificate and make sure the share is listed in your name (not in “street name”, as it might be at most brokers). Some companies make this easier than others and will let you do it through their transfer agent, others make you buy the shares before you contact them. This has gotten much less complicated over the years, it used to be a deterrent but probably isn’t much of one anymore.
- Set up a DRIP/DSPP account with that company. For McDonald’s, for example, you would go to this page for the info, prospectus, and enrollment form. Nearly all companies that offer these plans provide information on their website in some way, though some hide it better than others — McDonalds happens to make it more visible than most. Alternatively, you can also now search through the offerings from the various transfer agents to see which companies they cover, which can make it a little easier to set up multiple companies. Almost all of the direct purchase plan are run through large firms like Computershare or AmStock.
- Set up your ongoing purchases — decide whether you want to put in $50 a month, or $100 a quarter, or whatever you want (within the individual company’s guidelines — each company is different, even if they’re through the same transfer agent).
- Start over with the next company you want to set up a DRIP with, and set up your files to enable you to track the individual accounts that you have with each of these companies. Recordkeeping and tax accounting has also improved over the years, but it’s still not necessarily as simple as brokerage account recordkeeping
- Repeat until you’ve got your full portfolio set up of 2, 3, 5, 10, or 12 companies — as many as you feel like managing and investing in on a regular basis.
- Watch your investment slowly grow as you dollar-cost-average in with more purchases on a regular basis, and allow all of the dividends to be reinvested in more shares.
For a more streamlined strategy:
- Open a discount brokerage account with a broker who will offer free dividend reinvestment and low commissions. I personally use TDAmeritrade among the discount brokers, and there are certainly plenty of others like TradeKing.com, Scottrade, E*trade and many more that might work for you. (There used to be a few services that allowed for fractional share investing, led by Sharebuilder, but I don’t think any such services are currently available)
- Buy as many shares of a particular stock as you want. Buy as many shares of another stock as you want. And another.
- Tell your broker that you want to reinvest your dividends. Almost all discount and full-service brokers will do this for you, for free.
In my opinion, the main valuable thing that DRIP/SRP plans offer to small investors that your standard discount broker doesn’t is fractional share purchasing — that’s what allows you to invest a set dollar amount every month without worrying about the exact price of the shares.
For McDonald’s, for example, you might be investing $50 a month even though the price is $120 per share one month and $70 per share another month — you just get fractional shares. If you’re using a free or discount broker instead, you have to buy some number of whole shares (though that number can be 1 if you like). Most brokers do allow fractional shares for dividend reinvestment, just not for purchases, and you should earn dividends on those fractional shares no matter who you buy through.
If you were using a regular discount broker, you would probably want to invest at least a couple hundred dollars at a time to make sure the commissions are a small percentage of your investment — I think keeping commissions at 1-2% is a reasonable goal to shoot for when you’re starting out, which with a $5 commission would mean investing at least $250 at a time. Most DSPP/DRIP/SRP plans have significantly lower minimum and ongoing investment requirements than that, though some do not. Pfizer, for example, requires $500 to set up the account but only $50 for each subsequent investment.
And finally — do note that that if you decide to open a DRIP plan or a DSPP plan through an individual company, they generally all have different account minimums, fees, and general policies.
On the plus side, if you’re the kind of person who is a reckless emotional trading addict and is trying to lock himself into being a buy-and-hold investor, these plans can be great for that because they make it quite a bit more inconvenient to sell your stock — you can’t quickly sell the stock and have that cash available to trade 30 seconds later so you can buy the next hot Chinese IPO, like you can with a brokerage account. For some people, that’s probably a good thing.
When you’re building a steady and “safe” portfolio of stocks for dividend reinvestment, stability of earnings and growth of the dividend are the key considerations, you’re not betting on a stock that will double in a year or even in five years, you’re betting on steady compounding growth as each dividend adds to your holdings slightly, and builds on that next dividend slightly until you open that statement a few years later and are pleasantly surprised to see how the holding has grown.
It’s not sexy, but if your grandparents built stock market wealth that’s probably how they did it … and it’s a lot more consistent than picking hot mining or biotech stocks or trading options or staring bleary-eyed at stock charts all day and churning your portfolio. Not that those other options, with their occasional 1,000% gains, aren’t a lot more fun to try with some of your play money, of course.
So the plans do exist, though it’s much better to think of them as “incremental investment” plans than it is to daydream about the “$1,166 to $12,160 in monthly income” that you might possibly get from a portfolio of these kinds of stocks after many decades of investing small amounts in “blue chip” dividend growth companies… assuming that you choose stocks that really do have staying power, and that you’re able to keep up the monthly or quarterly investments for 20 or 30 or 40 years to accumulate some real wealth. If you’re already in your 60s or 70s, this is not a “rescue” that can create miracles in the last few years before you retire — though that doesn’t mean it’s necessarily a bad idea, just that it’s still “investing in stocks.”
There’s nothing magic about investing in stocks, putting a bit more each month into your portfolio, and watching the returns compound — but if there is anything surprising about the performance of these kinds of plans it comes mostly from the time, not the plan. Compounding, automatic saving/investing that you can gradually forget about, and long periods of time can make this a powerful investment strategy, but ‘buying direct’ doesn’t make the investment better by itself…. and I think the “long periods of time” part is more important than anything else, and is the fuel for most of those stories of the multimillionaire secretaries who never made much, but saved for 50 years and then retired with fortunes.
And Leong does actually get into suggesting a couple specific investments for his “SRP” plan — so we can check on those if you’re interested…
“Sponsored Retirement Plan #1
“Your first recommended plan is sponsored by a cash-rich company based in Virginia that paid higher annual dividends for 45 consecutive years. It paid $2.9 billion in the past nine months and recently announced that it will increase its dividend by 8.3%, a major driver for its sponsored plans.”
That data’s a bit old, but I suspect this is Altria (MO), the old Philip Morris and the owner of those iconic cigarette brands like Marlboro and Merit in the US (along with a few other mostly tobacco-related businesses). It’s been a fantastic investment for decades, and they have been raising the dividend pretty rapidly in the years since they spun off Kraft and their international divisions (into Philip Morris International, PMI), including recent dividend increases that have been in the 8-9% area most years. The current dividend is about 3.5%, and they do indeed have a direct stock purchase/DRIP plan administered by Computershare, the basic info is here.
I won’t invest in cigarette companies, both for personal reasons and because I’m skeptical of their ability to continue to sustain good investor returns in an era of steady declines in smoking, at least in the US, but it has certainly worked well for a long time — and I haven’t checked recently, but Altria (in all its previous names) is probably the single best dividend-paying investment of the last 50 years. And be careful about making huge assumptions about how “cash rich” they are, if this is indeed Leong’s stock — they also carry a bucketload of debt and face significant regulatory and tax liabilities that may not be predictable.
“Sponsored Retirement Plan #2
“This plan, sponsored by a leading global consumer products company, has paid uninterrupted dividends since 1895 and increased payments every year for the last 51 years. The company recently announced an increase to its cash dividends of 6%…a boost for its sponsored plans.”
This one is Colgate-Palmolive (CL), though again the data is a bit old, the most recent dividend increase was 3% and the current yield is only a touch over 2%… this one has also been a stupendous long-term performer, though like most “blue chip” type stocks it’s also the kind of thing that everyone is buying right now as they panic about the future and bemoan the fact that even 10-year notes pay sub-2% coupons. CL is a good example of what dividend reinvestment can do, over the past 25 years the stock has gone up by 1,300%… but if you reinvested dividends, the return would have been more like 2,300%. Their direct purchase plan details are here.
“Sponsored Retirement Plan #3
“A global brand in more than 175 countries that generates over $3 billion in cash flows from its operations, this company has a record of 41 straight years of dividend increases. The company joined the elite ranks of the ‘Dividend Aristocrats,’ a few dozen companies that have 25-year track records of annual increases in their payouts.”
This one, assuming that we’re dealing with data that’s a couple years old for each of these teased examples, is Kimberly-Clark (KMB), which you almost certainly know because of their large global brands like Kleenex, Scott tissues, Kotex, Huggies, etc. KMB has faced declining cash flow since 2012, but it was over $3 billion a couple years ago (it’s now about $2.8 billion over the past four quarters), and it is a dividend aristocrat with a long history of increases — the last dividend increase was by about 4.5%, and the current yield is just under 3%. Kimberly-Clark’s direct purchase plan details are here.
So there you have it — yes, investing a set amount each month and letting dividends reinvest for decades can help you compound your savings into a pretty substantial nest egg… but picking the right stocks, being disciplined with making regular investments, and having a long period of time are all important parts of the strategy. Think Leong has picked good stocks to start with? Have others you’d favor? Let us know with a comment below.
P.S. Should you decide that you love Leong’s ideas and you want to try out this subscription from the Lombardi folks, do note that they’re a bit sneakier than most with the pricing — unlike most newsletters, who will “lock you in” at the price you pay originally, this one has two teaser prices… first is a $10 fee to start a six month subscription, then if you don’t cancel within 30 days they charge you another $87.50 for the balance of the six month subscription, and at expiration of that six months they charge you $295 a year. That’s all in the small print on the order form — as always, caveat emptor.