Grab Stock “On The House” with “The SD-Cap Authorization Pin”

High Yield Picks from StreetAuthority

By Travis Johnson, Stock Gumshoe, October 6, 2009

This teaser comes in from Paul Tracy at the StreetAuthority family of newsletters, it’s for their High-Yield Investing newsletter that’s edited by Carla Pasternak … and, as so many newsletters do, they’ve taken a fairly commonplace investing strategy and given it a fake and mysterious name.

Is that enough to get you to sign up for their newsletter? Well, if so, it ought to be enough to get you to read a few more paragraphs here, because I’m sure I can explain this “SD-Cap Authorization Pin” for you … or at least, tell you what they’re really talking about when they tease that we can get stock “on the house.”

Here’s how they tease the idea:

“Locked Away In the Dusty File Cabinets of a Small Circle of Companies There Exists a 40-Year Old, Accounting Loophole Allowing YOU to Grab…

“Stock… “On The House”

“Revealed: Immediately After Reading This Letter, Simply Punch in a 10-Digit “SD-Cap Authorization Pin” & Get Handed Shares To the World’s Most Profitable Companies…

“On Somebody Else’s Tab!”

Sounds nice, right? Now, I don’t need that free stock, personally, because I just got an email that told me I’ve won the International Lottery … but for you, dear readers, I’ll continue to dig in to this one …

“3 Companies Are Prepared To Pay You $959 a Month to Take These Free Shares Off Their Hands!”

That’s right — we’re being teased not just with the idea of this free stock, but with three specific companies that will hand it to you … nice, no?

The ad essentially says that if you have the right 10-digit “SD-Cap Authorization Pin” you can demand free stock from corporations.

Which is, of course, mostly hoooey — but there is just enough truth underneath it to get away with the claim (they temper that claim a bit later in the letter, when all but the most vigilant Gumshoes have given up on reading).

And as we almost see, they run through the stories of several ordinary folks who built fortunes, or retired early, or rescued their retirement dreams, using this “SD-Cap Authorization Pin” to “quickly amass” shares of blue chip companies — and bank big quarterly payouts to boot.

So what the heck are they talking about?

Well, I hate to be the one to tell you this … but this is an old strategy we’ve looked at many times before. In simple terms, it’s just the concept of dividend reinvestment … but because there are a good number of companies that sell their stock directly to investors, and some of them will give you a small discount for reinvesting your dividends through their plans, there is a chance that you can get some small amount of stock “free.”

These are usually called DRIPs (Dividend Reinvestment Plans) or sometimes DSPPs (Direct Stock Purchase Plans), and probably about a third of the larger companies you’ve heard of offer them. We often see this concept teased– I’ve written about it when was teased as the “801k plan,” and it has more recently been pitched as the “One Share Millionaire” plan.

Why? Well, because lots of folks haven’t heard about them — and companies aren’t allowed to (and probably wouldn’t really try to anyway) market their direct sales programs, so that creates a light veneer of mystery that might be just enough to get you to sign up for a newsletter.

But that doesn’t make them magic. These plans, which I’ll call DRIPs for simplicity’s sake, essentially involve you buying at least a single share of some company that you consider to be a “blue chip” stock that you’d like to hold forever, preferably one that you think has the potential for a growing dividend in the years to come. Then you tell them to reinvest your dividends, and each reinvested dividend buys more shares, compounding the total investment over time.

Paul Tracy even pulls out the old Albert Einstein quote that he almost certainly never actually uttered — in this case, he claims that Einstein called compound interest the “eighth wonder of the world” … that’s a new one for me, I’ve heard the attribution that he called it the “most powerful force in the universe,” which is more contextually interesting but also very likely apocryphal.

Whether or not Einstein really thought about dividends and interest is, of course, immaterial — compounding and, indeed, dividends in general are powerful forces in determining your investing returns. It’s simple math — the reinvested dividends create a larger shareholding, which means the next dividend will be larger (assuming they don’t cut the dividend), and it keeps building ad infinitum.

But it does take time — there are probably folks who started out with 100 shares of Johnson and Johnson 40 years ago and now get more cash from each quarterly dividend than they had originally invested, but there’s no substitute for that long time of compounding that builds your wealth, which can be a tough sell in a world where instant options trading millions are teased every day, so they have to stretch the facts a bit and claim that you’re getting “free” shares in order to get your attention. Patience and long-term compounding of your investments are rarely inspiring enough to get you to urgently sign up for a newsletter subscription.

So … how do you find these shares? You can buy directly from any number of companies, most of them will have some kind of entry for DRIP, DSPP, share purchase, or something similarly worded on the investor relations part of their website — but they also almost all use one of the relatively few large firms that manage these programs, so you can start out with those firms to get listings and ideas. A few that might be reasonable places to begin perusing lists of the available DSPP and DRIP programs are BNY Mellon, American Stock Transfer and Trust, and Computershare. There’s also a blogger who has put together a listing of Canadian firms that offer DRIPs, and if you’re looking to read up on these plans there are many usefu