IRM(72), The “Second Income Plan”, and other “secrets”

How are these lucky souls turning $50 into a million bucks?

By Travis Johnson, Stock Gumshoe, June 18, 2014

These kinds of secret income pitches get sent around all the time, and that’s been true ever since Stock Gumshoe started publishing in 2007 — some of our very first articles were about deciphering the “secrets” behind schemes described as “801k Plans” (because they’re “twice as good as 401k plans“) and other terms that are lost to my faltering memory.

And now the latest crop of these pitches is getting Gumshoe readers intrigued, so it’s time to take another look. The two pitches that we’re being asked about now are the “Second Income Plan” or “Corporate Retirement Plan” from Nathan Slaughter at High-Yield Investing (pitch is here if you want the source), and the “IRM(72)” from The Crows Nest (you can see that pitch here if you’re curious).

So what are they talking about?

Well, there are likely different stocks they’re suggesting to their readers, they don’t hint around much about the specific stocks… but the strategies are simple — the “Second Income Plan” and “Corporate Retirement Plan” are teasing this strategy based on the premise that it’s like the original employee stock ownership plans (ESOPs) of 50 years ago, but can now get income for non-employees of select companies… and the IRM(72) “hook” is the power of compounded income… but they’re both simply teasing direct stock purchase plans (DSPPs) and dividend reinvestment plans (DRIPs).


That’s right — the “magical” growth of income they tease in these pitches, with a single share of stock bought for $50 that turns into $80,000, is, for all real purposes, simply the most optimistic outcome from the combination of “buy and hold” and “reinvest your dividends,” with the kicker of “keep making regular small contributions” to sweeten the pot.

Here’s a snippet from Jimmy Mengel:

“IRM(72) Retirement Plans

“They’re 100% legal and can generate up to $1 million more cash than Social Security, IRAs, 401(k)s, and even Obama’s new ‘MyRAs’

“I’m referring to a censored program that allows you to collect anywhere from $500,000 up to $1 million from a one-time investment through what I call the IRM(72) plan.

“And even though IRM(72) retirement plans can generate up to 10 times more cash than IRAs, your typical 401(k), or even Obama’s newly proposed MyRA (a short way of saying ‘My IRA’)…

“Most people haven’t heard about IRM(72) plans for one simple reason.

“Companies that offer these plans are forbidden to advertise them to the public.”

The “one time investment” stuff is disingenuous — you’re certainly not going to invest $200 into an “IRM(72)” and turn that into $500,000, not unless you’ve got a few centuries to compound those dividends (we’ll get into a couple examples in a minute) — but exaggerated hype in the ads doesn’t necessarily mean that a strategy is without merit.

The “72” part refers to the “rule of 72” — which is a shorthand way to calculate the time it will take for your initial investment to double if earnings are compounded. The rule of 72 is not precisely accurate, but it’s simple and it matches reality pretty well in most cases — basically, you just take the number 72, divide it by the annual percentage growth rate you expect, and the result is the number of years it will take for an investment, compounding at that rate, to double.

So if you expect an annual dividend of 5% and think that payout is stable and you will reinvest the dividends, your investment should double in about 14 years. The idea is to do better than that, of course, by picking better companies with growing dividends and, hopefully, companies that are providing returns above and beyond the dividend as they grow their business, but that’s the basic way to think about compounding returns.

And no, Einstein probably did not actually call compound interest the “eighth wonder of the world”, but the sentiment is often attributed to him… and that doesn’t mean it’s not powerful — money that earns money that earns more money is how fortunes are often built, even if it takes a long time to get up to critical mass (and even if, unfortunately, you don’t get much of a kick from “safe” compound interest like CDs when interest rates are low).

And here’s a bit from Slaughter:

“Some companies offer the best type of retirement plan. And for those lucky enough to work there — it’s a near guarantee of retiring rich and early…

“For the most part, this unique type of retirement plan is only available to the employees of those companies.

“But what many people don’t realize is that some of these companies are required by law to also make the plan available to their employees’ families… and as a result to ordinary folks who have NEVER worked for these companies!

“It’s all part of a little-known S.E.C. regulation that removed the restrictions on these programs, providing equality among American industries.

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“That means regular folks like you can take advantage of these plans too, even if you’ve never worked a single minute for one of these companies.

“In short, you can tap into the same kind of benefits that many of America’s most well-off retirees are already getting — and you don’t have to be on the payroll.”

Slaughter’s references to a few companies and their “retirement plans” are references to employee stock purchase programs, or employee stock ownership plans (including the Peninsula Newspaper Company, which was the first ESOP in the 1950s when the owners were trying to find a way to retire and leave the company to their employees), and those have indeed been wealth builders for many employees over the years — often because, in the case of some companies like Wal-Mart or McDonald’s, they’ve been benefits exercised at little to no cost by very low-wage workers who wouldn’t otherwise have been buying stocks at all. Of course, over the years many companies have also essentially forced their employees to buy stock in order to get their full retirement benefits, which hasn’t always worked well.

It is indeed true that you can buy stock direct from companies, and that you can enroll in their DRIP programs and into recurring direct purchase programs that will let you automatically put an unnoticed (to you) $50 a month (or some similarly smallish amount) into that same stock, and over time those recurring investments and the reinvested dividends do grow into a larger sum. Assuming, of course, that you chose a stock which wasn’t eternally dwindling in value.

And in that way, you can do something similar to what Wal-Mart employees or employees of any other large corporation who participate in employee stock plans have done. Of course, there’s also the problem of employees who built up substantial holdings in their own company’s stock through employee stock purchase programs, whether inside or outside a retirement account, and saw both their job and their account get hammered when the company went under (those have been fairly rare occurrences, thankfully, but also good reminders of the value of diversification — one need only mention the single word “Enron” to recall that blue chip, adored companies can, indeed, disappear… or, less criminally, Polaroid or Kodak).

But frankly, these days I think the value of such programs for most investors is primarily psychological. If you are a person who can invest a set amount each month, hold on to dividend-paying stocks with patience, reinvest those dividends, and not worry about fluctuating markets, then it is now fairly simple and inexpensive to make recurring purchases and reinvest dividends with any of a number of cheap or nearly free discount brokerage accounts, or with DRIP-focused services like Sharebuilder, though in cases where individuals just want to pick a few companies and make very small ($50-100) investment in each of them each month, it may be worth the trouble to buy direct from the company. Almost every broker will reinvest dividends for you for free, though you may in some cases have to instruct them to do so first.

That was not the case 46 years ago, when direct stock purchases were first approved and when these programs were initially set up (and yes, it’s true that companies are not allowed to advertise their direct stock purchase programs or solicit buyers — they’re not brokers). Even 20 years ago, before discount brokers had driven down costs across the board, these programs were hugely important because full service brokerage accounts simply wouldn’t make sense for investors who want to buy small chunks of stock in $50, $100 or $300 increments.

If you do decide to “buy direct,” you can often find these plans on company websites but to buy in you would actually go through one of the few major firms that administers these plans for companies — you do sort of buy direct from the company, not on the stock exchange, but it’s done through an intermediary. The biggest one of these is Computershare, where you can search for company plans here, or you can also browse the offerings at American Stock Transfer & Trust here. It used to be that you had to buy a share from a broker, get it put in your name and sometimes get the physical certificate, then sign up with the company, but firms like Computershare can now often make the process quite a bit more streamlined (not in every case, each company’s plan is different).

But the important thing, really, is not whether you’re buying direct from the company or from a broker, in most cases the prices will be the same (do note those very rare stocks that will allow you to reinvest at a discount or provide some similar “direct” bonus — that’s a nice kicker that may be worth the hassle of buying direct), but which stocks you want to buy for the long term and how you can manage those purchases best for your circumstances.

If you can invest $50 a month, do you think it will be better to pick your favorite blue chip or “emerging blue chip” stock and buy that one stock each month, or to buy a broad index ETF of some sort, or an open-ended low-cost mutual fund? If you’re confident in a stock and in what that company will do over the next 25 years, then that may be your best bet — but betting that all on one company carries dramatically higher risk.

If you just want the power of compounding and you don’t have a few specific strong dividend-paying companies you want to commit to, and wish to have the ability to make small recurring purchases, it might be that the safer (and the far more diversified) plan is to make recurring purchases of an open-ended mutual fund that tracks a major global index (just make it an extremely low-cost fund, and don’t pay a load/sales charge) — those funds weren’t cheap and easily available 50 years ago, either. Some mutual funds have higher initial investments that are a hurdle for folks just trying to build a portfolio, but there are low-minimum options — the Schwab S&P 500 Index (SWPPX), for example, has annual expenses of less than a tenth of a percentage point and a minimum account opening amount of $100 (according to Morningstar). The magic of compounding works for indexes, too, just not as powerfully as choosing the best companies (it is, though, far better than choosing the worst companies).

So whether or not you wish to subscribe to a newsletter to teach you the power of compounded investing, well, that’s up to you — I can give you an example from a well-known stock in my portfolio that I happened to buy at a time when yields were substantially higher.

This roughly describes one of my positions:

If you had bought 50 shares of Verizon (VZ) about five years ago at $28 a share it would have cost $1,400, a decent initial position for many small investors. Over the ensuing five years you would have received a quarterly dividend, with the dividend steadily rising, and it turns out you were pretty lucky on that initial purchase, too, because the stock last year hit a high price of double that amount. You didn’t have to make any decisions or do anything, and the dividends were reinvested each quarter so in quarters when the price was low you might have gotten 1.5 new shares with each dividend payment, when the price was high you might have gotten 1/3 of a share that quarter.

After five years of reinvesting dividends and a rising share price, the $1,400 investment in 50 shares has turned into 72 shares that are worth about $3,500.

If you took your dividends in cash instead of reinvesting them, you’d still have 50 shares and they’d be worth about $2,450, and you would have collected almost exactly $500 in dividends (total) during those years.

So the power of compounding/reinvestment, in this case, is $550 (The $3,500 reinvested total vs. the no reinvestment total of $2,450+$500 cash) — that’s how much the total was improved by the fact that those dividends were reinvested, and that the subsequent dividends were paid on a higher number of shares. Of course, you could have done something even better with that $500 in cash dividends… or squandered it on comic books and candy bars.

Not every case or time period works out this well (starting in 2009 was a huge benefit to that example), and some work out better, but the power of reinvested and compounding dividend payments are part of the reason why I resist selling stocks that I own that are good companies with steady dividend payments — even if the valuation of the stock might seem too high or they’ve had a bad quarter or two that brought the share price down.

It’s a “steady as she goes” game when you wait for compounded dividend income, it’s not well suited to those who watch their portfolio’s live ticks up and down each day because those folks (and I look at one in the mirror sometimes) are often convinced by the flow of news that they should be doing something.

DRIP investing, whether through a broker or direct through a company or in a mutual fund, all starts with the mentality that you must stay to some disciplined plan, ignore market gyrations (while keeping in mind that some attention must be paid, particularly to avoid committing yourself to a company in genuine long-term decline) and keep adding to the pile of invested capital. Had I continued to add to that holding in the example, and bought another share of Verizon each month for $30-50 each, the total would be far, far higher and each monthly purchase would have seemed relatively immaterial to my family’s budget.

So there is no magic to “IRM(72)” or to a “Second Income Plan” … like anything else, in order to have a good chance of success you have to make disciplined choices, consistently put money to work, and let your money work for you without sabotaging it with constant trading in and out of your positions. I’m not knocking the options traders or the day traders or the swing traders — Lots of folks are able to be very successful traders — but it’s definitely not for everyone. The clear tendency of individual investors, as represented by mutual fund flows, is to sell at the bottom and buy at the top — if you can invest each month in quality dividend-paying companies, let your money compound, and get out of your own way, well, that’s a pretty nice way to build a foundation for your portfolio.

It won’t turn $50 into a million bucks in a hurry… but $50 a month? Well, if you find a stock that yields 3% and that increases in value by an average of 5% a year, which is hopefully (but maybe not) pretty conservative, then you start with a $50 investment today and your account hits $20,000 in about 17 years even if the company never raises the dividend. If you can up that to $50 a week then your investment hits $20,000 in about 6-1/2 years.

Those are achievable returns for careful and diligent investors — the outliers, the ones who turned that little position in IBM into a million dollars, are folks who both got lucky and who had 50+ years to ignore that stock position during a few massive bull markets. And time definitely works wonders when you reinvest and compound — if you take even that same mythical, conservative stock that yields 3% and goes up by 5% a year and keep up your steady $50 a week for 50 years, you end up with $1.4 million. Which will hopefully still be a meaningful amount of money in 2064.

So that’s all well and good, particularly if you’re a small investor just wondering how to get started and scrape together a portfolio. And if you choose stocks well and are disciplined it usually works well even over shorter periods of five or ten years, too, just not as dramatically… but no, there’s no immediate magic in it.

Neither of these newsletters pitched their favorite DRIP ideas for us, so we don’t have a big stock to “reveal” today — but we’ll take your suggestions, and if a bunch of you chime in I will compile a list of the favorite DRIP ideas of Gumshoe readers. Feel free to share your best dividend reinvestment stock ideas with a comment below, and maybe we’ll all learn a little something or get a few interesting ideas to consider.

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August 24, 2014 12:24 pm