Mitchell Clark edits Passive Monthly Income for Lombardi, and an ad of theirs this week promises great gains from “PRIP” investments…
… so, naturally, we want to know what those are. Right? I don’t know if we want to subscribe to Passive Monthly Income or not, that’s one of dozens of newsletters published by Lombardi, most of which seem to change their name every year or two… and Mitchell Clark seems to be helming five or six of them at any given moment, ranging from micro caps to biotechs to income stocks. That seems to be spreading it awfully thin.
But, of course, we’re always on the hunt for a new idea… so what’s this one? Here’s the intro:
“These Six Government Chartered & Regulated Financial Institutions Offer PERPETUAL RETIREMENT INCOME PLANS
“(PRIP payments have been increasing at an average of 12% a year over the past 10 years. They are deposited right into your account. Unlike Social Security, your heirs get your monthly PRIP payments after you’re gone. The Post calls them a ‘Free Ride In Retirement.)….
“An income plan—loved by retirees—has been lurking quietly in the financial industry for 150 years. And it’s issued exclusively by just six of the richest and most stable financial institutions in the world.
“These six firms are ranked #1 in their business by almost every major economic watchdog, including the World Economic Forum.
“But that’s not the only thing that makes these six firms worthy of this presentation and your time…
“These government chartered and regulated institutions started issuing Perpetual Retirement Income Plans, or PRIPs for short, way back in 1829.”
So what is a “PRIP?” Well, they made up the name — but you already figured that out — but it is, as you are probably already guessing, what you’re probably more used to hearing about as DRIPs, Dividend ReInvestment Plans.
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Here’s a bit more…
“Four big U.S. banks—JPMorgan, Bank of America, Wells Fargo, and Goldman Sachs—are paying only 2%, 1%, 3%, and 1%, respectively, on their regular common shares…and all of them got billions in government bailouts.
“Meanwhile, four of Canada’s top banks are paying record-high dividends like 4%, 4%, 4%, and 5%.
“And that’s regular dividends on just their common shares, for starters.
“The perpetual income payments I’m talking about compound much faster for two important reasons:
(1) You are enrolling in the Perpetual Retirement Income Plan directly with the bank that issues it; and
(2) You are often getting a discount of up to 5% off the market price of the shares when you buy them directly from the bank.”
Is that true? Well, sort of. Dividends compound faster if you reinvest them — so your money is making more money, and that money makes more money still — and for plans that do offer a discount (there are precious few, unfortunately), you do get a further little boost in that compounding.
Those who’ve been astride the Gumshoe rocking horse for more than a few months will probably already know what I think about DRIP investing — it makes good sense in some specific situations, but for most people the key is not the “secret” DRIP plans, it’s the simple act of using a discount broker and choosing to reinvest their dividends (which most brokers will do for you without charge).
Dividend Reinvesting Plans, sometimes also called (or associated with) Direct Stock Purchase Plans (DSPPs), are a relic of the 1970s and 80s for the most part — they are usually managed by one of the big transfer agents like Computershare, and they let you buy stock directly from a company instead of going through a broker. That was a bigger deal 20 and 30 years ago, because commissions were high and small investors were not really catered to by most brokers.
They still exist because they’ve formed a little niche — they let you buy shares and hold them in your own name, which is important to some people, and, more importantly, they reinvest dividends, sometimes (very rarely) at a discount and, most importantly, they allow investors to make small, regular investments in the company, usually including fractional shares.
If you want to buy $100 worth of Coca Cola shares every month, for example, you’ll get eaten alive by brokerage commissions at most brokers and you’ll have to roll over a fair amount of cash each month until it builds up to buy enough whole shares — at $40 a share, you could buy two shares the first month plus pay a $8 commission (average), have $12 left over just sitting there and not earning anything, then with $100 again the next month plus your $12 remainder you could still buy just two shares and then you’d have $24 sitting there waiting for it to build up to buy a share, etc. The commission ends up eating 7-8% of your capital, and you also aren’t buying very efficiently.
For those trying to invest consistently each month with relatively small amounts there are some DRIP-focused and partial share investment brokers you can also use, like Sharebuilder, and pay a smaller ongoing fee of more like $4 per trade per month and get to invest in partial shares and reinvest dividends… and there are free trading services also start up every now and then and never seem to stay free for more than a couple years — Robinhood is the latest one I’ve seen, though they don’t do partial shares or reinvest dividends currently — but it’s in this “recurring small buys” niche that the DRIP plans still hold some appeal.
If you buy direct from Coke, it’s slightly more reasonable with a $50 minimum purchase and an ongoing $2 fee for recurring investments (though Coke also charges a dividend reinvestment fee, which most brokers do not — 5%, up to $2 per transaction), and they will invest the full amount you deposit each month and give you partial shares… the downside, in comparison with discount brokers or services like Sharebuilder, is that you then effectively have a different account for each stock you buy through a DRIP and there’s a little bit more of a reporting headache come tax time… and DRIPs are set up to discourage selling, so they’re certainly not trading vehicles — sales are charged a $15-25 commission most of the time, and there are no cash clearing accounts like at your regular broker so you’d have to wait a few days after a sale to withdraw your money or move it to some other plan. Which is probably a good thing for most people, to be sure — inactivity and sloth are often the marks of a successful investor — but it’s a pain in the neck for some.
The Lombardi folks aren’t recommending Coke shares here, but you can see Coke’s Computershare plan description here to give you an idea of what a typical “blue chip” DRIP plan might look like.
So what are they recommending? Well, as you’d guess from the commentary about Canadian banks above, they’re mostly touting DRIP investing in Canadian bank stocks.
And no, most of them don’t offer that 5% discount — though several of them used to, and they might again do so someday (I wouldn’t hold your breath).
Let’s check the details and see which ones they like for their “PRIP” investing strategy…
“How to Add Your Name to a Perpetual Retirement Income Plan
“The great thing about PRIPs is that you don’t have to live in Canada or have any Canadian ties to participate and get in on them.
“And it’s simple to sign up to take full advantage of Perpetual Retirement Income Plans.
“Getting your name on the Perpetual Retirement Income Plan of one of Canada’s richest and most stable banks and becoming a partner with them for life…
“…all begins with you owning just one share of the bank’s stock.”
Ooops, forgot to mention that part — yes, to enroll in a DRIP you usually have to already be a shareholder, so you have to buy a single share and get it transferred to your name, then register it with Computershare or whoever else is managing the plan for that company, then you can start a recurring investment or dividend reinvestment plan. Sometimes the DRIP administrator will make it easy and give you a way to buy that first share through them.
And then for the specific ones that Clark likes? Here are our clues for what they call the Three Best Secret Perpetual Retirement Income Plans.…
“Perpetual Retirement Income Plan #1
“This Perpetual Retirement Income Plan has been issued by a Canadian bank since 1829 and is the longest issuing plan, with never a payment missed in its 186-year history.
“In fact, this bank pays out up to 50% of the cash it generates (about $1.0 billion a quarter) to partners like you. With this plan, you start off right away with a dividend yield of 5%.
“The best part? You can get started with just one share if you like…and get a discount of up to 5% right away when you buy it.
“This bank has 47,000 employees, total assets of $663 billion, 1,537 branches, and 12 million customers.”
This one is BMO, often still called Bank of Montreal, so the “PRIP #1” is, when translated to language regular investors might understand, buying shares direct and enrolling in a DRIP plan in BMO stock. You can do that, if you like, though they no longer offer a 5% discount on the dividend reinvestment plan (they used to issue the shares for the DRIP directly at a discount, now they just buy them on the open market for you at market prices). Their details are available on the Canadian version of Computershare’s website here, though it should be available to both US and Canadian investors if you’re interested.
BMO seems like a well-managed bank, they did well through the financial crisis, as most of the big Canadian banks did, given their lack of exposure to securitized loans and mortgages to people with bad credit, but it’s not necessarily super cheap — it does carry an almost-5% dividend, which is pretty solid for a mega bank, and it trades at about 1.25X book value, but some of the enthusiasm for Canadian banks has waned with the commodities crash that has been hurting Canada (and the other major commodity-exporting economies). Part of that is the fall in the Canadian dollar — BMO traded in Toronto, in Canadian dollars, is down about 13% this year… but for US investors who own BMO in US dollars on the NYSE, it’s down 27%.
“Perpetual Retirement Income Plan #2
“This Perpetual Retirement Income Plan was established back in 1857 by another rich Canadian bank.
“You could enroll in this PRIP with just one share, get up to a 5% discount on your shares, and accumulate more shares at a discount. The only catch here: you need to start this plan with a minimum of $100.
“With 87,000 employees, 3,244 branches, and $837 billion in assets, it is one of the world’s biggest banks.
“And it’s the one retirement plan your name must be on right now….”
This is, as you guessed, another large Canadian bank, Scotiabank — also often called the Bank of Nova Scotia (BNS), though, belying the “small province” name, it’s also probably Canada’s most international bank. Their valuation is similar to BMO’s, a slightly larger premium to book value, a similar dividend, and similar chart performance with a peak in mid-2014 before the commodities markets, particularly oil, took a header.
Like BMO, BNS used to offer a 5% discount on dividend reinvestment, but they stopped doing that a little over a year ago. It’s technically possible that they could restart that discount, though I don’t see why they would without competitive pressure. The details of the plan at Computershare are here, and at the banks website here.
And to complete the trifecta…
“Perpetual Retirement Income Plan #3
“Since 1870, this international Canadian bank has been making payments to the accounts of fortunate individuals.
“This is the world’s 15th largest bank, with operations in 41 countries and total assets now surpassing $1.0 trillion.
“Over the last 10 years, this bank has increased its perpetual dividend payments by a whopping 140%.
“If you had put $10,000 in this plan 10 years ago, you would have started with a PRIP yield of 4%. Today, you’d be getting $950 a year from that $10,000, a yield of 9.5%
“Enroll today in this PRIP and you could get up to a 5% discount on your one-share purchase and there is no commission or set-up fee to get into the plan with this bank.”
This one is Royal Bank of Canada (RY), and the dividend is now about 140% higher than it was a decade ago… though that’s for Canadian investors, the growth is a bit more muted for US investors. And yes, that general idea of “Future yield” is what drives most dividend-growth and DRIP investors — Investing at a 4-5% yield and holding and reinvesting for a decade so that your compounding combined with the tendency of dividends to rise each year will often lead to a “yield on cost” of two or three times the initial yield you were receiving, depending, of course, on the performance of that individual stock. Dividend growth, and a historical track record of dividend growth that gives you confidence in a company’s commitment to continue that growth, is at least as important as current yield for long-term investors who want to benefit from compounding.
RY does also have that same language about “possibly” providing a 5% discount on dividend reinvestments, I didn’t check to see whether they’ve stopped actually offering that discount, but my guess would be that they have — if everyone else stops offering a discount, that gives you cover to stop as well, and there are very, very few stocks that still offer any kind of dividend reinvestment plan discount at all… in fact, more of them (though not these three banks, as far as I’ve noticed) have been squeezing in little incremental fees for direct investors. Generally, direct purchase/DRIP plans make sense only for folks who want to make small (less than $500-1,000, I’d say), recurring investments into a single stock, and who can commit to that for a long period of time without worrying about the stock — which means you need to choose a company with staying power, and not plan on trying to trade in and out if you hit a 20% stop loss. For larger investors, the commissions at discount brokerages are negligible and the flexibility of a single brokerage account is a lot easier to handle — unless you do find one of those rare stocks that offers a reinvestment discount, or you have strong feelings about having your stocks in your name instead of “street name” through your broker.
So there you have it — three “perpetual Retirement Income Plan” investments — and, wouldn’t you know it, they’re quite similar to what the Lombardi folks were pitching as “New Swiss Bank Accounts” for much of the last three years. If you’d bought these three stocks a year ago you’d probably be pretty grouchy, given their weak performance since last Summer, but in general the Canadian banks are still often referred to as more stable and reliable than their US competitors because they didn’t require big bailouts and bounced back quite quickly from the last financial crisis… though if the next crisis is in Canadian housing, or the Canadian energy patch, well, who knows how these businesses will roll. I suspect they’ll probably work out pretty well for long term dividend growth investors who reinvest their dividends (or use a direct purchase plan to buy $100 worth of shares every month), given their long histories and their pretty diversified (and very large) businesses and their history of solid dividend payment, but the key for any such investment is not just prescient stock selection… it’s time (and patience). The big returns for dividend compounders come over a decade or three, not over a year.
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