“A Bizarre Type of Dividend the SEC Doesn’t Want You to Have”

What are the "5th Payouts" teased by Tom Dyson for his Palm Beach Letter?

Tom Dyson at the Palm Beach Letter has generally been a relatively low-risk, income-focused guy — he used to run the 12% Letter for Stansberry, before starting Palm Beach Letter with Mark Ford a couple years ago, and for a newsletter guy he does relatively little of the “swing for the fences” stuff.

Not that the pitches and promise for his letter aren’t a bit over the top — he’s still part of the Agora family, still using the same copywriters who help turn a search for steady 5-10% returns into “life changing wealth” and “secret” and “rare” investments that “the SEC doesn’t want you to have.”

Just like with his pitch for the “770 Account” that was so popular a few months ago, still being sold as “The Secret Investment Account: How to Fund Your Own Worry-Free, 100% Tax-Free Retirement” — it may work out well for many folks, that pitch for participating whole life insurance that’s adjusted with riders to maximize cash value and participating dividends from mutual insurance companies, but it’s not as simple as the “Fund your retirement” pitch makes us believe after a quick listen. Partly that’s on the reader — we read between the lines to make things seem even better than the copywriter says, because we want a nice, greedy short-cut to wealth… but copywriters are trying to sell you something, not to educate you.

So as with all newsletter pitches, the goal here at Stock Gumshoe is to keep an open mind — the ads are usually ridiculous, the claims that are used to catch your attention are obviously not to be relied upon… but that doesn’t mean the investments or strategies these letters are suggesting aren’t good. Sometimes they are. So shall we see what Dyson is pitching today?

“A Bizarre Type of Dividend the SEC Doesn’t Want You to Have

“The three small companies in this report distribute a rare type of payout that can increase your yield by as much as 586% overnight

“Only .105% of U.S. companies in existence make this distribution. Hard to believe? That’s what we thought. But our investigation into this situation has produced the real story behind this ‘cover-up.'”

So that’s why you would buy this letter after reading the ad — they know about secret, hard-to-find companies that send out “rare” and “covered up” cash payments to investors. Enticing, right? Here’s some more:

“You see, for nearly a decade now, a handful of America’s top-shelf companies have been paying unscheduled ‘5th payouts’ to shareholders.

“They are not ordinary special dividends that pay out sporadically… nor are they regular dividends. Yet they’re up to several times bigger.”

I know many Gumshoe readers are dividend hounds, either because they’re just sensible folks who know that much of the return of the S&P 500 over the last century has been because of reinvested dividends and the power of compounding or just because they are (like so many people now) trying to generate retirement income in a world where money is cheap and unloved, so the idea that there are “secret” dividends out there from companies who are sending out “5th payouts” is compelling indeed (most US dividend-payers issue quarterly payments).

So what are these “several times bigger” dividends?

Well, they are special dividends — but unlike most special dividends, which are one-time events that are tied to some kind of corporate event (like spinning off a business) or are used to reward shareholders or mollify activist investors, what Dyson’s talking about are essentially recurring special dividends — payouts from companies who could afford to pay a much larger quarterly dividend, but have chosen instead to pay out the earnings they don’t need to retain in the form of an annual dividend, typically at the end of their fiscal year.

“You see, for nearly a decade now, a handful of America’s top-shelf companies have been paying unscheduled “5th payouts” to shareholders.

“They are not ordinary special dividends that pay out sporadically… nor are they regular dividends. Yet they’re up to several times bigger.

“Consider one income stock I was looking at…

“It’s a U.S. retailer with an 18-year history of paying out dividends.

“As you know, dividend stocks typically pay out four times per year.

“This company was paying out five times…

“And here’s the kicker…

“The 5th payout was always 3-4 times larger than the other payments—combined.

“If you owned 1,000 shares, you would have deposited an $1,800 check. Just on that 5th payout in 2010….

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“In October the following year, the same company distributed another 5th payout: $2.50 per share….

“The next year, the company paid yet another massive payout: $2.25 per share.

“And the year after? $4.50.”

So that’s the idea — some companies routinely top off their dividends to shareholders with a fifth regular payment. These aren’t typically recorded as part of the annual yield in major finance portals online, so a stock that might actually have paid dividends that tally up to a 10% yield might look, on a quick screen, like it only yields 2%… therefore these are “secret” dividends. Got it?

And, perhaps more importantly, they’re dividends that are more explicitly tied to the company’s performance for that year — all dividends should be tied to the company’s actual cash flow and earnings, so that dividends don’t rise when those inputs aren’t rising, but in practice almost every company that pays a regular quarterly dividend feels strong pressure to either keep it steady or, preferably, raise the dividend at least once a year. Theoretically, these “special dividend” payers think, investors will be less likely to punish them if the “extra” dividend is cut or fails to grow in the future — that’s true for one-time payouts but when it becomes a habit, all bets are off. In practice, anything that a company does for a couple years in a row — even if it’s not technically a “regular” thing — becomes an investor expectation.

What, then, are the actual stocks being touted by Palm Beach Letter?

Well, this retailer is actually the first one, but they tease that the special report includes “bizarre dividend” recommendations for three companies… we’ll see if we can name ’em all. Some more clues:

“… a handful of big investors have been taking advantage of this retailer’s huge, unscheduled payouts…

“Including Dennis Nelson, a multimillionaire investor in the Midwest…

“And the Vanguard Group—one of the most powerful financial entities in the world…

“But because this information is typically hard to find on the major financial sites… and because it’s not even being reported on the typical legal documents from the SEC…

“Most regular investors have no clue this company and its payouts exist.”

Well, you need no longer suffer in the absence of knowledge — this retailer with a “5th payout” is The Buckle (BKE), a stock we’ve mentioned at least once or twice in these parts. It’s been a growth darling for quite a few years now as it expands its western/midwestern retail style to malls around the country, and they do indeed have a multimillionaire investor named Dennis Nelson on their shareholder rolls (he’s also the CEO, so it’s not a big surprise). They’re headquartered in Nebraska and have about 450 stores now, all selling casual branded apparel with a significant focus on jeans, including their own private label BKE denim. They are still very much concentrated in the Central and Mountain time zones, but have gradually moved out of their Texas/Midwest strongholds over the years — though fairly new to investors’ radar screens, the company has been public for more than 20 years.

And yes, their dividend yield is misleading on most financial portals like Yahoo Finance or Bloomberg, and in most brokerage information screens, where it is reported to have a 88 cent annual dividend which, based on the current share price of about $48, means it yields about 1.9%. That’s more or less accurate when it comes to the regular quarterly dividend, which has been growing and is now at 22 cents per quarter… but it doesn’t reflect the annual special dividends that they have consistently paid since 2008.

There’s reason to look more closely at Buckle, I imagine — the “fifth payout” was far lower this year than it was in the past several years, around $1.20 versus the $4.50+ they paid out in late 2012 (that one may have been unusually high because of fears of the rising dividend tax — that’s a guess, I haven’t checked, but this payment was also substantially lower than the 2010 or 2011 “specials”). It still looks like a pretty reasonably valued company based on the trailing PE ratio of about 14, and they have a lot of potential growth if they want to invest in continuing to expand their footprint and share count — but though they did not show revenue or earnings growth last year…

… and there’s also a very high (and growing) short position in the stock, so there’s something in there that investors don’t like. To be fair, the short position has been very high at Buckle for much of the past five years — for quite a while there has been skepticism about their ability to expand, whether that skepticism is warranted or is just a coast-centric opinion about a midwestern retailer I don’t know. They were a big “same store sales” growth story for several years, but that growth rate has fizzled out lately so I’d suggest reading up on the company, including their specific expansion plans, and seeing if you think they’ll be continuing to grow their store count.

I don’t know what the ceiling is for mid-price clothing retailers — Gap has about 3,000 US stores, Aeropostale has just under 1,000, New York and Company around 500. Those aren’t comparables, really, but it gives you an idea of what a fashion retailer with relatively small, mostly mall-based stores might be able to do — and interestingly, it can also point us to the wide variety of valuations in the fashion space, New York & Company (NWY) has roughly the same number of stores as The Buckle and has annual sales within 10% or so of BKE, but is valued at about $250 million vs. BKE’s $2+ billion. NWY is a dramatically worse company, they’re unprofitable and not beloved like BKE sometimes has been, and they don’t have that history of blistering same store sales growth to beckon investors, but fashions change and it’s worth remembering that these kinds of companies are bets on the skills of retail managers and their ability to drive and react to fashion trends — as well, of course, as being stocks that can be buffeted by demographic trends or by mall traffic. NWY has a ROE of 2% and profit margins of less than 1%, BKE has a ROE of almost 50% and profit margins of 14%, so BKE is obviously a far, far better business, and it’s rightly priced as a better business, but it looks like there are some short sellers who believe it has maximized the amount of money they can squeeze out of the midwestern denim fashion market. I don’t have a horse in this race, so you can make up your own mind.

How about the other stocks Dyson teased? He doesn’t give as many clues about those, but we’ll see what we can find in the next bit of teasiness:

“Out of the 5,708 stocks on the U.S. exchanges, there are only around 200 companies that periodically pay special dividends.

“That’s not even 3% of the stocks in America. Pretty rare, right?

“Well, the ones that distribute what we call ‘5th payouts’ are even fewer in number.

“We haven’t seen any official studies on this… but by our count, there are only about half a dozen.

“That’s only .105% of stocks in America that pay out these unusual 5th dividends….

“Like I said, I can’t go into all of the indicators… but what these companies have in common is a healthy regard for cash. And a desire to put that money back into the hands of shareholders.

“Take another company we’ve been following… an energy company.

“In 2012, they paid out so much money in the form of this 5th payout that you could have pocketed an extra $12,500 that year… had you owned 5,000 shares.

“In 2013, you could have collected roughly the same amount—$10,000. That’s $22,500 in extra cash in two years…”

And a bit more about that “energy company” …

“If you’d invested $5,000 in the energy company five years ago, you’d now be sitting on $18,100.

“And that’s just in stock appreciation…

“You would have also earned $2,000 in 5th dividend payouts for 2013.”

Which started the Thinkolator chugging along, with the realization that most of the special dividend payers in the energy space have been shippers and refiners — but then we thankfully got a quick little unexpected clue that narrowed it down:

“You’ll learn about a petroleum refiner (the energy company we mentioned) that’s distributed 11 5th payouts in the last three years. That’s an extra $5,500 for every 1,000 shares held.”

So now we can tell you that yes, the Thinkolator confirms that Dyson is teasing HollyFrontier (HFC). I’ve never been particularly good at figuring out the refiners once you get beyond the “if oil goes down, gas goes down more slowly so refiners book more profit” argument or the geographic advantages that one refiner might have (those with mid-continent refineries have done well lately because they can buy oil cheaper from the Bakken while coastal refineries have mostly had to pay international prices). Don’t know anything about HollyFrontier, other than that they’re being teased by Palm Beach Letter here and they’ve been paying their “special dividends” on a quarterly basis, so the “regular” 30 cent quarterly dividend gives them a yield of about 2.4% but they also pay an extra 50 cents each quarter so the real income yield currently is about 6.5%. They’ve only been paying that “extra $2 a year” since late 2011, and it has remained constant during that time, but the base dividend has risen each year so the dividend has gradually increased.

HFC is a big company, market cap of about $10 billion, they (surprising to me) don’t have that much debt, and analysts think their revenue will be flat to down a bit but their earnings will keep growing. If you include the “fifth payout” extra dividends, they pay out more in dividends than they make in profits — that can keep up for a long time in capital intensive business like refining, where the depreciation charges may be far larger than their actual maintenance capital spending requirements, but it may be something to keep an eye on.

And that’s about all I can tell you about HollyFrontier without learning a lot more about refining — no time for that while we’ve got readers to email and another stock to ID, so if you’d like to pitch in with your thoughts on the business please feel free.

Last one is even more shrouded in mystery…

“You’ll learn about an asset manager where the insiders are buying like crazy. It’s no wonder: Over the past four years, had you owned 1,000 shares, you would have pocketed an extra $5,500 worth of these payouts.”

Thankfully we do get a chart to check out on this third secret company, so we can feed that into the gaping maw of the Mighty, Mighty Thinkolator and see what we learn…

… still waiting…

OK, here we go — the only asset managers I know of who have routinely paid out special dividends for many years in a row (at least four or five) are Cohen & Steers (CNS) and Gluskin Sheff (GS in Toronto, GLUSF on the pink sheets). Thanks to the power of the Thinkolator and the nice specificity of Dyson’s redacted chart, we can tell you that he’s teasing Cohen & Steers (CNS).

CNS is a global asset manager with a strong niche — they specialize in real estate securities and advise several real estate ETFs and mutual funds — and they have issued those “5th payouts” in each of the last four years on top of their regular 2.2% dividend yield. This past annual special dividend was $1.20 per share, which would give them a trailing yield of about 5%, but the extra payouts (unlike the much smaller regular dividend) have not been growing, they started in 2010 with a payout of $2.10 and the subsequent annual “bonus” dividends have been $1.15, $1.68, and $1.20. So if you know what it will be next year, then you’re a really good guesser.

I actually thought Gluskin Sheff looked interesting after my quick glance at the financials — I don’t know them or CNS very well personally, and haven’t studied many asset management companies very closely, but managing money for people is a really, really profitable business if you can develop a sustainable asset base so these may be worth a look if you’re so inclined.

And with that, I’ll leave you to cogitate on these “bizarre dividend” payers and illuminate your fellow investors with if you’ve an opinion to share — just use the friendly little comment box below.

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Thomas Hughes
Thomas Hughes
May 13, 2014 5:33 pm