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 ba