Income investors are a little desperate these days — the traditional CD ladders and government bonds and savings accounts just don’t do much for you, and rare is the person whose portfolio is so large that they can retire on a portfolio that yields only 2%. That creates a great market for folks who are selling yield — lots of folks are apparently lining up to subscribe to newsletter services that look for high-income investments, and publishers are eager to pitch yields and payouts.
So in that environment, it’s no surprise that Jimmy Mengel’s pitch for a “Guaranteed 30% Payout” is getting attention — it’s not only a big slug of money, but it’s also got that exciting sense of urgency because you have to buy in before March 25 to start slurping from the river of gold. So what’s he actually talking about?
Well, to get the details you can either sign up for $69 to subscribe to his newsletter, The Crow’s Nest… or you can have a little patience with your friendly neighborhood Stock Gumshoe as I dig through the clues and get you some answers. Let’s get started, here’s how Mengel entices us:
“COLLECT THIS GUARANTEED 30% PAYOUT
“In order to receive preferential tax treatment, this small company is going to dole out $34 million to its shareholders…
“Join this lucky group of investors by March 25th and collect this easy, one-time-only payout.
OK, so “preferential tax treatment” means, in almost every case, that the company converts to one of the special kinds of corporate entities or partnerships that doesn’t pay taxes — which means that they have to pass their income on to shareholders, who get the tax liability along with the earnings. You’re probably familiar with several of these kinds of “preferential” entities — Real Estate Investment Trusts (REITS), Master Limited Partnerships (MLPs), and Business Development Companies (BDCs).
So we’re almost certainly dealing with one of those kinds of companies, which almost always pay above-average yields compared to taxable corporations. Which one? More clues:
“… there are only roughly 50 companies that fit the profile these guys do….
“So long as you take action by March 25th, you will be guaranteed a 30% payout on however much you decide to put into this company….
“The company I’m about to fill you in on has been around for a decade and was recently invited to ring the opening bell at the NASDAQ exchange….”
So that’s pretty good, we’re close to a definitive answer already. And Mengel compares this opportunity to past cases like Equinix (EQIX), Ryman Hospitality (RHP) and others — both of those were REIT conversions, taxable corporations that became Real Estate Investment Trusts, so that’s no surprise.
And he does point out that the “secret that will give you the chance to DOUBLE this payout” is that you can hold on to the stock a while longer — sticking with these conversion stocks past that first big dividend or first special payout, since a few of the examples he gave (including EQIX) continued to rise nicely after that first payment to shareholders.
So that’s obviously not that exciting a “secret,” but at least he’s not just advocating a “dividend capture” where you buy to get the dividend, then sell shortly therafter… which is good, because that doesn’t usually work very well for large dividends and incurs a lot of taxable buying and selling (assuming you’re not using a tax-deferred account like a 401K or IRA, of course — REITs and BDCs are excellent for tax-deferred or tax-free accounts, since the dividends are “ordinary income” for the most part, not tax-advantaged “dividend income”, though MLPs are more complicated when it comes to tax considerations).
Not surprisingly, this “30%” that Mengel dangles in front of us is not the whole picture — there is also going to be, we’re told, an ongoing dividend stream. Here’s how he puts it:
“To even further reduce its tax bill (this company hates paying taxes almost as much as I do), this company is prepared to offer a very attractive dividend.
“Current estimations are looking at 12.5%, paid quarterly.
“That’s a great chunk of change every three months, AND it’s on top of the 30% you’ll earn if you get in by March 25, 2015….
“Now, when you calculate this stock’s yield with the one-time-only payout, you get a massive yield of 20%.”
So who is it? Well, Thinkolator sez we’re dealing with recent BDC conversion Newtek Business Services (NEWT), which has a happy little blue newt as its mascot… they won’t be giving the Geico gecko a real run for his money, but they actually do have a small insurance business, too.
This is a somewhat unusual business development company, because though they are a small business lender (as most BDCs are) they are also an established business services company — they do payment processing and payroll, primarily, though they do also do some other small-scale things like website design and hosting and consulting to help small businesses increase efficiency… presumably a lot of this work is done with the same companies they partner with to do small-scale business loans, so they probably know their customers and their businesses pretty well. Always good for a lender.
This is perceived as a pretty risky enterprise in general, though, lending to small businesses — the economy is doing reasonably well right now, but even in a good economy restaurants fail, dry cleaners go out of business, convenience stores go into bankruptcy. Like most BDCs, which are essentially little investment banks for small businesses, they diversify across a large number of clients so that a single geographic area or single business (or type of business) going into pain won’t crush their portfolio, and they lend to both startups and established businesses and new business acquisitions. They are way down at the low end of the scale in BDCs in the types of companies they lend to, it looks to me after a quick glance like they are loaning to REALLY small companies for the most part, with their average outstanding loan balance somewhere in the neighborhood of $150,000 — mostly collateralized with commercial real estate, tools and equipment, or residential real estate.
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Like other lenders, whether they be BDCs or banks, they earn a lot of their money because of leverage —