This ad caught my eye, because Nathan Slaughter (or his ad copywriter) is doing the same thing a lot of newsletter pundits do: Comparing apples to oranges in trying to give the impression that there’s some “secret” alternative to social security that save your retirement.
(There is the old “secret” alternative, of course, it’s called “save lots of money and invest well enough that it grows” … but that’s not all that fun, and if you’re already 60 years old it’s a bit late for compounding to help you very much).
So what is the story? Well, the ad for High-Yield Investing starts with the tale you probably already know quite well, the one about Social Security being in dire straits… here’s a taste:
“If you’re relying on Social Security for retirement, you better start working on Plan B.
“Because there is absolutely no way that the current system can make all the payouts it has promised.
“Look, everyone knows that Social Security is broke. That’s old news.
“But most people DON’T realize just how bad the situation is.
“Social Security has paid out more in benefits than it received in payroll taxes for eight straight years.
“The system is hemorrhaging $253 million per day. That comes to $7 billion a month… and $84 billion a year.
“The only way Social Security is still making payments is by ‘borrowing’ from a trust fund that was set up for future beneficiaries.”
OK, so no surprise there — Social Security has had a cash flow problem (more going out than in) for quite a while, and folks have been talking about that not just since the tide turned and started going out, but for 20+ years before that as the very clear and actuarial math became quite predictable. The solutions are as obvious as the problems — in order to make social security sustainable either payroll tax income has to go up, or benefit payouts, mostly for retirees, have to go down.
There are lots of potential ways to do that, including removing the social security payroll cap and increasing the age for benefit (or full benefit) eligibility), but there hasn’t been any real decisionmaking for 30+ years, ever since politicians started to realize that the only people who reliably vote in large numbers are senior citizens.
Slaughter does say there have been “cutbacks” already, citing the various initiatives from the Social Security Administration last year that certainly felt like cutbacks if you were relying on those provisions in the law — though it was also described as “closing loopholes” and getting rid of some of the complexity that let folks use different filing types and dates to increase their benefits (that’s mostly about spousal benefits and maximizing the “credits” you get for filing for benefits later, there’s a pretty good Kiplinger’s article about that here from late last year).
The end game for the next phase of Social Security reform is not at all clear, of course, Slaughter picks a few points from Trump and Clinton about their plans which add some kind of means testing or new taxes on social security benefits, or increase social security payroll taxes by lifting the $118,500 “cap” to some higher number or removing it entirely, and it’s a bipartisan issue in the worst way: Both parties are trying desperately to look like they’re solving the problem without making any taxpayers mad — cue my favorite cartoon here from Western Massachusetts’ favorite son, Dr. Seuss.
So, naturally, if you’re 40 or 50 or 60 years old, you’re probably a bit worried about Social Security being sustainable and about whether or not you can really count on those benefits that get calculated in the letter you get right around your birthday every year (or punched into your financial advisor’s algorithms to help you figure out if you’ll outlive your money). Which makes you a great candidate for a promise about a strategy that will get you “$43,543 a year FOR LIFE.” And if you’re in your 50s or 60s or 70s, particularly if you’re a man and are at least at a “middle class” income level, well, you’re also a member of every publisher’s favorite demographic: People most likely to subscribe to investment newsletters.
Where does that $43,543 come from? Let’s cull a few more clues from the ad:
“With 10,000 Baby Boomers retiring every day, it will take a miracle to fix the system before it plunges off a cliff.
“Well, I’m not sitting around hoping for a miracle.
“Instead, I’ve created a self-funded and self-directed “retirement insurance” program that will keep on paying you no matter what the politicians do to Social Security.
“In just five simple steps, I can show you how to lock in a second income that exceeds your promised Social Security payout.
“In fact, my clients are generating an average of $43,543 per year with this system… deposited directly into their account every month.
“You can just copy them and make the same money they do. Why not? All it takes is five simple steps.
“And once you’re set up in the program, you’ll have the luxury of never worrying about Social Security again.”
Sounds perfect, right? Just get “set up in the program” and you can “lock in a second income?” Where do I sign up?
First, some more talk about how fabulous the program is:
“… while Social Security is dead broke, these managers have created more than $14.2 billion in system assets. And the value of these assets is growing about 5% a year.
“Again, getting this money doesn’t affect your regular Social Security in any manner.
“You aren’t exchanging one benefit for another… and you aren’t forced to take a reduced rate on your current benefits.
“This is simply income in addition to what you collect from Social Security. Best of all, it’s open to anyone.
“You can collect eve if you’ve never worked a day in your life.”
OK, this is starting to sound like magic. What’s the catch?
“This new money is in addition to anything you get from Social Security. And it’s a lot more generous, too.
“The average Social Security retirement benefit is $1,236 per month. The absolute max for anyone who starts their checks coming at their “Full Retirement Age” of 66 in 2016 is $2,639.
“Our Social Security Insurance averages $3,628 per month. A thousand bucks MORE.”
I don’t get it… you get more money from this special program, the managers are already in charge of billions of dollars, you don’t have to wait until retirement age… why isn’t everyone doing this?
Oh, right, because we didn’t mention where the money comes from. Social Security has an income stream, it has the bonds from the “trust fund” that people have paid in in the past, and it has the ongoing tax revenue coming in. Where does the money from this “$43,543 per year” program come from?
Oh, right, it’s you. Bummer, right? These are investment gains we’re talking about, dividends and capital gains… so you have to invest your capital to reap the rewards. Only logical, of course, and perhaps only fair, but there’s no mention of that in the ad yet to this point… so far it’s all about what you’ll take home, not what you put in.
“These People Are Already Pulling In Tens of Thousands a Year
“Our Social Security Insurance Program is the most reliable retirement plan you will ever use… because it is based on economic reality, not politicians’ promises….
“If you’re naturally drawn to an independent lifestyle… are ready to devote 10 minutes a month to follow the program… and most important—if you understand that Social Security is so strapped for cash that it might not be there to help when you need it most—then this program is perfect for you.
“Once I show you what to do, you can start getting paid just like these other folks.”
And then we start to get the inkling that yes, what Slaughter is talking about here is not some special super-secret income strategy that you can join… but just dividends.
“The 5 Keys to Nailing Down a MINIMUM of $43,543 per Year in Bonus Income for the Rest of Your Life
“Our Social Security Insurance Program combines five remarkable income streams—in five unrelated business sectors—into one bullet-proof retirement-funding package:
– A global shipper that yields 13.8% a year
– A 9.9% yielder backed by the federal government
– A Midwestern business you can buy into that hands over all profits to its investors
– A “private bank” that pays you 13 times more interest than CDs
– A unique “landlord” that lets you pocket monthly payments from the richest group of people in America.
“A typical participant in this Social Security Insurance Program is bringing in $43,543 to their account every year.
“And that’s just the average. If you have a more substantial portfolio, you could easily hit $100,000 per year in additional income.”
And then, for the first time, we get that passing reference to the fact that yes, you have to have money to make money:
“In five simple steps you can easily pocket $8,800 to $13,800 a year for every $100k you put into these cash cows.”
OK then… so now we’re off of this idea of “Social Security Insurance” and back to a familiar notion — using high-dividend investments to generate and compound income. It’s not a terrible idea, of course, I’m as tempted by a nice dividend yield as the next guy… though, since we’re talking about retirement and security and the amounts you can “pull in,” it’s important to remember that you can’t put these 8-13% annual yields into your spreadsheets and assume that the payout will grow forever, or that the money you invest in buying shares of these high-dividend stocks will maintain its value. High yielding stocks didn’t fare much better than the overall market during the crash of 2008-2009, and many fared worse and lost far more than half their value… and some went bankrupt or never recovered.
So there’s the big-picture warning: This is not “insurance” and it’s not anything like Social Security. This is highly variable and arguably high-risk investing in owning shares of companies that pay out high dividend yields to stockholders. This strategy reasonably has a place in many portfolios, but it’s not magic or perfect and it’s not nearly as predictable as Social Security, even given Social Security’s problems (and, of course, your Social Security benefits are loosely based on what you earned in your lifetime… but you don’t have to put up an extra $100,000 in capital to start getting your $16,092 in annual Social Security benefits if you’re retired, the comparison of one to the other is silly and misleading).
What, then are those “five steps” — what are those five high-yield investments he’s recommending for his readers? Let’s check on the clues.
“Lock Down This 13.8% Yield Immediately
“Our first Social Security Insurance position is a way to cash in on one of the most critical engines in the world economy: global trade.
“It’s a highly regarded container shipper… so in demand that its fleet is booked 97% of the time… with 18 ships crossing the oceans getting paid up to $47,200 per day.
“This is just about the safest shipping investment you’ll find. It has no major debt to pay off until 2019. And thanks to long-term leases, revenues are locked in for years ahead. So the cash flow to cover your dividend is virtually guaranteed.
On top of its 13.8% yield, there’s one more reason I love this one: Barring a total collapse in world trade, you’ll continue to get paid no matter what, because this is a preferred stock….
“Because of its proven track record of reliable payments, I am making this cash cow a keystone position in our Social Security Insurance Program.
“The whole point of income investing is to make your money work hard for you. And compared to the average stock yielding 2%, your money will work seven times harder this way.”
Preferred stocks, as you probably know, are in the nether regions between stocks and bonds — they generally have fixed quarterly payouts/dividends, and they can rise or fall in value as the company falls in and out of favor, and the dividends are generally more secure than the dividends a company might pay on common stock, but not as contractually guaranteed as bond coupons (and the dividends don’t generally grow, like a great common stock dividend does).
So which one is this? This is the preferred stock of a company called Global Ship Lease — the common equity ticker is GSL, the preferred is the Cumulative Series B preferred, and it’s cited many different ways at different brokers but is generally going to have a ticker like GSL-B or GSL-PB or GSLPB. It’s a $25 preferred that has a coupon of 8.75%, so at the current price of $18 or so the yield is close to 12% now (it was higher a few months back). I don’t know anything about this one, the basics are available at the Preferred Stock Channel here and the company’s latest investor presentation from a few months ago is available here.
If I were looking into this, I’d think about when their leases are rolling off and what utilization rates are, and about how strong their operators are — particularly given the well-publicized problems with Hanjin, one of the largest container ship operators in the world. Container shipping is not quite a “blood in the streets” sector at this moment, I suppose, but it is certainly a contrarian investment.
“Grab this 9%-Yielder Backed by Uncle Sam
“Wall Street insiders call this unique outfit Uncle Sam’s landlord. Its business model is sheer genius: It borrows money at low short-term rates… buys properties… rents them out to high-paying government agencies… and pockets the spread.
“Simple, but elegant—and it works like a charm. Government tenants tend to stay in place for decades, so empty space is scarcely a problem. Occupancy rates hang at 95.1%.
“On top of giving you 9% on your money, this one is growing fast, too.
“The company doubled in size since its IPO five years ago, when it owned 33 properties with 4 million square feet. Today, it holds the keys to 69 properties and more than 10 million square feet.”
This must be Government Properties Trust (GOV), which was indeed at 95.1% occupancy back in March (it’s dipped slightly below that now)… and like most REITs it has risen quite a bit this year, so though the yield was 9% back in the beginning of the summer it’s down to about 7.8% at current prices. I was a little bit skeptical of this one when I covered it for a different teaser back in the Spring, so you can see that if you want more discussion of GOV… I haven’t looked closely at it in recent months, it is a high-volatility high-yield REIT that has underperformed the average REIT since the 2011 IPO largely because of a very weak 2015… but has done much better than the REIT index so far this year (50% total return vs. 8% for the VNQ REIT).
“Collect On Rising Rents—Forever
“Here’s the ideal play on a large, wealthy and growing market… and a great way to generate extra cash in retirement.
“It’s an expertly-run nursing-home operator that owns 428 assisted-living facilities in 43 states… and is generating so much cash that it has raised its dividend nine times in the past 13 years.
“Now paying a 9.9% yield, you can just sit on this one… reinvest your dividends… and in five years you’ll be pulling in 15.9% a year on your initial investment. And that’s before you even account for another dividend increase.”
This one is almost certainly, sez the Thinkolator, Senior Housing Properties Trust (SNH). They’re now at 436 properties, they say, but they were at 428. They’re not all assisted living properties, though more than half of the properties are either
“independent living” or “assisted living” facilities (most of the rest are medical office buildings).
And like GOV, this is a relatively high-yield REIT that is quite volatile, it has soared this year but has been pretty weak longer-term in comparison with its health care REIT peers. They have also not been terribly compelling when it comes to dividend growth, which I generally think of as more important than getting the highest current yield — they have raised the dividend nine times in 13 years, but they’ve been small dividend raises and they haven’t raised the dividend since 2013. I don’t know much more about them, but at a quick glance nothing about SNH stands out as particularly compelling compared to the basket of healthcare REITs I already own (MPW, VTR, DOC and OHI).
You’ll probably notice that high yield stocks tend to be very sensitive to dividend changes or interest rates, and sometimes that means they react even more violently to changing interest rate sentiment than the REITs with more “normal” yields… over the past week, for example, with the furor over Fed chatter twisting income investors into knots, the “average” REIT (the VNQ ETF) is down about 5% while GOV and SNH are both down about 9%. Which, as you may have noticed if you’re doing the math, means that the stocks moved more in five days than they pay in dividends in a year — though so did VNQ, since its yield is substantially lower. High-yield REITs are volatile these days, and folks who are primarily looking for income and stability sometimes have trouble with that.
I’ve run out of time here, thanks to my blatheration about Social Security — sorry about that, but we’ll get to those other two “steps” on the magical route to $43,000 in income next time. And if you’ve got thoughts to share on owning REITs like GOV or SNH, or preferreds like GSL-PB, or any other favored high-yield investments… well, let us know with a comment below.