by Travis Johnson, Stock Gumshoe | October 7, 2008 12:24 pm
Now that’s a nice promise for these trying days — the “greatest income investment of all time.” Even Jim Cramer is yelling about investing in dividend stocks, and certainly for anyone within ten years of retirement the fact that we’ve now given up all of the past decade’s gains in the market is probably quite chilling — getting returns in the form of actual cash in your pocket is awfully compelling.
Today we’ve got the pleasure of looking at an ad for Graham Summers’ new(ish) service, the International Wealth Advisory. Graham used to work at Stansberry & Associates, where he edited Inside Strategist, a newsletter that claimed insight into insider buying trends (it’s now edited by Brian Heyliger). That newsletter used some over-the-top marketing pitches like the USG-4 campaign — but to Graham’s credit, he says that the aggressive marketing at Stansberry was one of the reasons he struck out on his own.
I haven’t written about any of the marketing pieces he’s used in the past six months or so with this new service, just because he hasn’t done much in the way of over-the-top ads. He sent me an email back in April that told me that his new service valued transparency and straightforward investing — and he had this to say about his marketing strategy:
“I don’t care for gimmicky sales pieces or clever marketing metaphors. I don’t even have a copywriter on staff. Instead, I’m writing all the marketing pieces. I have to admit, they’re not very big on ‘marketing.’ You certainly wouldn’t think much of them.”
He seems, from my very limited exchanges with him, to be a decent chap — and I generally like his free email newsletter. But I just noticed a new ad campaign of his that had some nice hyperbolic marketing attached, so I thought I’d write it up for you.
And yes, he does have a “secret” investment idea for you — and you’ll have to sign up for his newsletter if you want a copy of the special report that he’s calling: “STIMULUS DIVIDENDS: Big Income Courtesy of the US Government.” It’s selling for $99 at the moment, and like most of the other publishers he’ll give you your money back if you don’t like it, but if you’re just interested in finding out a little bit of info about “Reagan’s Stimulus Dividends” … well, read on!
Now, one thing stands out as a bit odd — I’ll tell you even before we begin that I have some fondness for this particular investment that he’s teasing, but it’s not at all “international” as you would expect from a newsletter called International Wealth Advisory. From the mutual fund world we’re conditioned to believe that “international” means investing in foreign countries, and “global” means investing both in the U.S. and overseas. But that’s neither here nor there if he’s got an interesting investment idea for us …
Here’s how Graham teases this one:
“Ronald Reagan’s ‘Stimulus Dividends’ Have Returned 17% a Year Since 1998
“This obscure corporate-tax loophole created by Ronald Reagan in 1987 is STILL paying investors up to 50 times MORE money than Bush’s one-time Stimulus Checks – up to $150,000 a year!
“The next check gets cut in a few short weeks. I believe so strongly these investments are critical in today’s investing climate I’ll send you all the details for FREE…”Are you getting our free Daily Update
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That might actually be enough to trip the synapses for some of you, and you may have already guessed what this investment is … but don’t blurt it out and spoil the surprise! We’ll get to it in just a moment …
Graham goes on to use one of the more powerful newsletter marketing tools — comparing ridiculously unrelated things to make his idea seem brilliant. He notes that this “stimulus” from the Reagan tax loophole gets you an average payout of $6,000 versus the recent Bush stimulus check of $600.
And he throws in another fun tool, throwing out only the exciting part of the relevant numbers. He mentions the average annual payouts for several of these “stimulus” investments — last year, the average payout was over $10,000 — and he includes some “testimonials” from readers that also throw out some exciting numbers:
“Douglas Whitehead, 61, runs a large rental agency. But he collected $16,478 from “STIMULUS DIVIDENDS” last year.
“Rex Ross, 64, a former software engineer, added an additional $44,707 to his income with “STIMULUS DIVIDENDS” in 2007.
“Paul Glaske, 74, a retired businessman, received an incredible $141,812.”
So, class, who can tell me what’s missing from all of those numbers? Yes, that’s right — we have no idea how much capital these folks invested. I can quite easily get you an annual dividend of $141,812 as long as you invest $4 million (that’s roughly what you’d get buying 10 year treasury bonds). If you invest $250,000, it’s a lot harder …
… but probably more importantly, from a psychological perspective, if you don’t mention how much it costs to get into these investments, then the numbers seem like free money. So please, whenever these ads tell you how much money various individuals made from particular investments in the past … just ignore it. It’s probably real even if it’s incomplete, but it doesn’t mean anything to you.
And he shares a bit more about why you should want to buy these investments:
“With housing prices collapsing, a volatile stock market, and the dollar falling lower every day, it’s hard to find a safe place for your money right now.
“It’s harder still to find a place to grow your wealth.
“So it’s not surprising that “STIMULUS DIVIDENDS” are quickly becoming one of the most popular investment opportunities among investors in the know.
“It’s a rock-solid way to build your wealth…
- MSN Money writes “Often [the] payments grow as much as 7% a year. And they do all this in a way that lets you defer taxes.”
- “STIMULUS DIVIDENDS” are a “high yielding instrument” says Barron’s.
- BusinessWeek says “STIMULUS DIVIDENDS,” provide investors with “steady income in unsteady times.”
“If you are looking for extra payouts to fund an early retirement, or if you simply want to see more money deposited into your bank account every year “STIMULUS DIVIDENDS” might be perfect for you.”
OK — so what are these investments?
Well, I regret to inform you that Graham didn’t tease us about any of the specific names he might like, but the investments are:
Master Limited Partnerships (MLP’s)
Master Limited Partnerships were indeed boosted dramatically by Reagan’s tax changes in the 1986 tax law — so much so that that they were given a bad name for a few years because they were manipulated as tax shelters, and MLP-related scams that purported to shield you from taxes were legion.
But most of that controversy got shaken out, and the law was modified to get rid of the worst offenses — so now, Master Limited Partnerships are legit, often very appealing, investments for those who like income.
Master Limited Partnerships exist in a few sectors, but in the main when you hear about MLPs it’s usually in relation to the transportation of oil and natural gas. Most MLPs are owners of pipeline and storage and distribution systems for gas and oil, and they generally consist of a general partner and a bunch of limited partners — the general partner is the firm that actually manages the pipeline, and they typically get a larger share of the income or fees for their work, and the limited partners are individual investors like you who get a right to their portion of the income from the operation of the pipeline (or whatever else). Some general partners are also publicly traded companies.
MLPs and other publicly traded partnerships are not a secret, of course — they have been around for decades, and they have been legitimate investments for a long time, tarred though they remain by the scams of the 1980s in some peoples’ minds.
Here are the basics of MLPs as I see them:
They are sort of like Real Estate Investment Trusts, in that they are required to pay out the lion’s share of their income directly to shareholders. Actually, it’s even a bit better — they pay out most of their free cash flow, not just the income.
That comes with a flip side, too — they don’t retain cash earnings to fund growth, so if they want to expand with big capital projects they need to dilute current owners and issue new shares (or “units”, as they’re usually called). Other than that, any growth in the dividend has to come from relatively subdued increases in their rates, generally in a regulated environment, or from increasing the return on capital that’s given to shareholders (ie, raising the dividend without raising the amount of income coming in to the partnership).
And it is, actually, a bit more complicated than that — you are a partner in the business, so you are on the hook for their earnings regardless of how much they actually distribute in dividends. In most cases they distribute more than they “earn” and some of that dividend is characterized as a return of capital, so the taxes and obligations are a bit more complex than with most common stocks.
In terms of taxes, they are sheltered in two ways …
Because of the above, also note that you should be careful about what kind of account you use for MLP holdings — some folks will argue that you should keep them in IRAs or tax sheltered accounts because it simplifies reporting for small accounts, others will tell you that this negates the major tax benefits of MLPs. I have no idea what is allowed along those lines, or how the advantages or disadvantages might break down for you. My basic understanding is that if you earn more than $1,000 in MLP income in an IRA (or 401k, or whatever similar account) in a year you have additional reporting and possible tax obligations even though it is theoretically a tax-deferred account (this is called Unrelated Business Taxable Income), and that, though it’s complicated to handle the K-1 filings sometimes, the tax-deferred nature of MLP distributions could make it worth your while to keep them in a taxable account. Please read up on that before you believe my tax-related blathering.
MLPs are fairly simple and predictable — most of them, at least the ones that are primarily pipeline operators, operate in a regulated environment and are allowed to raise rates periodically to account for capital investment needs … and on top of that, they often sell their capacity through long term contracts of five or ten years, so the future is relatively predictable.
Though the shares often go down in sympathy with oil or gas prices, pipeline operators don’t generally depend on high prices — they are toll operators, they collect a fee for transporting stuff, they don’t generally produce, buy, or sell oil and gas.
There are reasons why you may not hear much about these, though they are certainly growing in popularity — they are complicated and somewhat difficult for some investors to understand, they are generally smallish companies, and they aren’t usually owned by institutional investors to a great degree (though the old rule, that mutual funds weren’t allowed to own MLPs, was scrapped four or five years ago).
The basic reason for being of a MLP pipeline operator is that big oil and gas companies don’t generally like to keep huge, expensive pipeline systems on their books or deal with maintaining those pipes — so they rely on others to build and operate them, and sign long term contracts to use those pipelines to move their products.
I can’t do much fussing about the idea of investing in MLPs these days — I actually agree that now’s a pretty good time to be looking at some of the better ones, as long as you’re wiling to put in the time to understand each individual company and how it is positioned — learning what assets they own, how they’re able to increase payouts (if they are), whether they serve end markets that are generally growing, that kind of thing.
That’s not to say that buying MLPs is always smart — I would agree that this is a decent time to buy many of them, but not that it’s always a good time. Last year I wrote a few times about MLPs, most notably for a long-running ad campaign called the “American Oil Pension” that teased these same kinds of investments. I noted back then, and still believe, that buying these companies when the yield is down to 5 or 6% is probably not going to be worth your while.
But today, many of the relatively stable pipeline partnerships have dividend payouts of 7, 8 or even 10%+ — that gives a much nicer margin of safety, and a possible capital gain potential if they return to favor and go back to those 5-6% yields someday (assuming that they do so by increasing in share price, of course, not by cutting the distribution). If you can find an MLP that covers its dividend with cash flow, you’re off to a good start in finding one that looks worthwhile.
There are plenty of other kinds of publicly traded partnerships as well — beyond the pipeline partnerships that are probably the most stable high dividend partnerships you can buy units of partnerships that own ships (like Teekay’s Liquefied Natural Gas tanker partnership, TGP), or run financial services companies (like Blackstone, BX, or AllianceBernstein, AB), or invest in infrastructure (Brookfield Infrastructure Partners, BIP) or produce fertilizer (Terra Nitrogen, TNH), or own cemeteries (StoneMor Partners, STON) or amusement parks (Cedar Fair, FUN), just to provide a few examples of the variety of partnerships you can buy.
There are many more, these are sort of comparable to the Canadian Royalty Trusts, in that various sectors often experiment with converting into partnerships for various reasons, so you find a few odd birds in any listing of publicly traded partnerships.
The other relatively large sector, apart from the pipeline and midstream and storage companies in natural gas (mostly) and oil and refined product transportation and distribution, are actual exploration or production companies in the energy sector. These companies will usually try to hedge their production, and are generally based on fairly significant reserves, but they tend also to have higher dividend yields because, on average, they’re subject to more risks in terms of actual production volumes and commodity prices. Companies in this niche include Linn Energy (LINE) and Breitburn Energy Partners (BBEP), both of which have yields in the neighborhood of 15% at the moment.
Whenever you look at a partnership investment like these, what most people really want are steady and reliable payouts, which is why pipelines and distribution networks were the first partnerships and are the most popular ones. If you’re looking for safe high yields, I’d look at these relatively conservative players first — and the yield is generally shorthand for what the market thinks the risk is. The big, steady players like Kinder Morgan Energy Partners yield about 8% now, the somewhat smaller ones that folks might have a bit more concern about might yield 10%.
As a general rule, I’d suggest that the higher the yield, the more important it is for you to research it fully to understand why investors are demanding a higher yield for that partnership unit — an example might be Boardwalk Pipeline Partners, which is also fairly large and owns some nice pipe, but is also controlled by a single shareholder and has had a bit of trouble keeping their expansion projects under budget, so, perhaps in part because of those concerns, it yields 10% (I own shares of Loews, which is majority owner and general partner of BWP). There are lots of individual differences between pipeline owners, from the age or quality of their lines, to the regulatory structure, to the rates on their current long-term deals, so you can research to your heart’s content if you like. For a list of the currently available Master Limited Partnerships, I’d start with my old favorite QuantumOnline.com (registration required, but free).
Otherwise, if you’re interested in reading up on some other partnerships to get you started, I wrote about the Publicly Traded Partnerships teased by Neil George early this year, and that old American Oil Pension article is available here.
And finally, if you’re one of those who prefers to diversify through funds, there is one company that has been around for a while that sells a line of closed end funds in the partnership space, Tortoise Capital Advisors — their biggest fund of MLPs, Tortoise Energy Infrastructure (TYG) currently yields 10%, and they have a few others (the list is here). And Claymore has a similar product that also yields about 10%, the Fiduciary/Claymore MLP Opportunity Fund (FMO). Keep in mind that some of these funds use leverage to boost returns, and that the expense ratios can sometimes be on the high side.
I do not currently own any MLPs, though I do hold Loews shares and I have looked at a few possible investments in this neighborhood in the past few weeks. I will not trade in any company or investment mentioned above for at least three days.
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