This article originally appeared on September 14, when the teaser pitch was circulating with a September 15 “deadline” to get your “extra $1,003 a month in benefits.” We’re getting a lot of questions about it again, so we’re republishing this article… other than the move to a December 15 “deadline,” the ad appears unchanged (and the stock being teased is still priced right around where it was back in September).
Originally published 9/14/17
These newsletter ads that promise “government payouts” or “extra Social Security” or other “free” money probably generate more questions (and complaints) than even the “get rich quick” spiels about the next hot gold miner or biotech breakthrough.
And you can see why — the target audience for investment newsletters is “folks in their 60s and 70s”, for the most part, and the complexity of Social Security often makes people feel like they might be doing something wrong… and, of course, the tendency for all of us is to feel like we deserve more than we’re getting, so the notion that the government owes us money can ring true on a subconscious level, even if we know it’s probably claptrap.
So let’s dig into this latest spiel, shall we? It’s from Personal Finance, a venerable investment newsletter that has gone through almost as many editors in the past few decades as Zsa Zsa Gabor had husbands (if you don’t get that reference, you’re not in the prime target demographic for newsletter promoters), currently being helmed by Jim Pearce (whose signature also rests at the bottom of the ad).
Pearce starts us off with the promise of “income” …
“This income-boosting loophole is so obscure, less than 1/10 of 1% of Americans are taking advantage of it.
“And that’s a shame. Because it allows you to boost your income by up to $12,040.
“Every year. For the rest of your life….
“Plus, it doesn’t matter how much money you currently make.
“Or even how old you are.
“This income boost is available to EVERYONE.
“Whether you’re 25… 40… 65… or even 80!
“In fact, my research shows 100% of the people who put their name on this plan’s list were approved.”
Gosh, a “plan” that offers income to everyone? And all you have to do is “put your name on the list?” I knew those “coastal elites” were getting something cool and free that I didn’t have! How do I get it?
They make us sit through more of the spiel first… he throws out a few examples of folks who are collecting this money….
“Brian W. from Augusta, Georgia….
“Even though he’s 48—and decades from retirement—he was still able to tap this opportunity for more than $1,720.
“Kathy N. a 57-year-old from Pennsylvania collected $6,020.
“And Tom S. who’s 69, raked in $12,040 last year thanks to this loophole.
“That’s just over $1,003 a month.
“Which amounts to a 73% income boost this former California avocado farmer can count on each and every year.”
I don’t know who these folks are, of course, they’re presumably subscribers to Personal Finance who sent in comments to the publisher, or perhaps folks who were interviewed about this in some publication and have had their names changed. I’m sure they really exist and do (or did) have income at those levels… but there’s nothing very specific said about how they got that income other than those nebulous references to “loopholes.”
What else do we learn?
More about how easy it is to “collect payments”…
“… the form which allows you to collect payments that average up to $1,003 a month is so simple to understand…
“You can complete it in 90 seconds. Maybe less.
“There’s nothing confusing about it.
“There’s no way you can mess it up.
“And there’s no way you can be turned down.
“Remember, this plan has nothing to do with the actual Social Security fund.
“When you submit the postcard-sized membership form it goes directly to a private sector company that has one of the most unique financial relationships ever formed with the U.S. Government.”
Aha then, there’s a “private sector company” involved. I bet you know where this is going, and it’s going away from “get payouts” and toward “buy payouts”. Lots of meaning in that little change of phrase.
What else do we learn about this company? More from Pearce…
“Unlike outfits who provide overlooked “everyday” services like internet access, electric, or even garbage collection…
“The company behind the plan I’m sharing with you today provides a resource so immense, expensive, and time-consuming to control…
“The folks in Washington paid them more than $227 million last year to oversee it.
“And allowed the company to escape paying corporate taxes at the same time.”
And, apparently, thanks to President Eisenhower, this company is “legally obligated to pay you a share of its profits.”
So here we are… now it’s not a “plan” or a “list” that you join, but a company whose shares you buy, and which is then obligated to pay you some of the profits.
Well that sounds awfully like a regular old tax pass-through company like a Real Estate Investment Trust (REIT), don’t it? REITs were created by a law Eisenhower signed in 1960, and they allow these real estate companies to avoid corporate taxation as long as they pass 90% of their profits through to shareholders (who then get the tax obligation along with the cash).
So we’re probably dealing with a REIT here, one that works with the government — a few of those have been teased over the years, so which one is it that Personal Finance is pitching today?
“… it locked up nearly a quarter of a billion dollars’ worth of contracts last year with 54 state and federal agencies including the two who siphon at least 31.2% from most Americans paychecks:
“The Internal Revenue Service (IRS) and the Social Security Administration (SSA).
“As soon as you’re accepted into this plan, you’ll immediately become eligible to recoup MORE of the tax money the government takes from you.
“Better still, since the payouts you get come from a private company…
“They won’t impact your current (or future) Social Security payments either.”
OK, so it’s a REIT that contracts with the gummint. Which means they are probably a landlord for government agencies. What else do we learn?
“… the minute you join, you’re entitled to payouts which are:
“Essentially the same as collecting extra Social Security benefits and getting a tax refund… at the same time.
“100% legal and above board. (Even though it may feel like you’re getting away with something!)
“I’m not talking about a little bit of money here, either.
“Since the end of 2009 when this company started accepting members…
“The payouts have increased from $10,741,000 to $122,366,000.
“That’s a staggering 11x increase.
“Plus, since there’s little chance of government spending ever shrinking…
“I fully expect these payouts will continue to grow.
“Imagine how the money you collect from this plan could change your life.
“You could finally forget about working just to pay the bills…
“And finally start getting ahead.
“Even if it’s just a little bit.
“This opportunity is so simple to become a part of… you don’t even need internet access.
“In fact, all you really need to join is a pen…
“And about $20 in your bank account to cover the membership fee.”
Man, that’s a finely crafted temptation — the payouts go from $10 million to $122 million and will keep growing, and you get to forget about financial stress… and all you need is $20 in your bank account to cover a “membership fee?” Man, what’s the catch?
Well, the catch is that your “payouts” are entirely dependent on the amount you invest — that “membership fee” that is so obliquely referred to (that’s the first point in the ad where there’s any reference made to you having to pay anything for this).
To be fair, Pearce does later go on to note, though not in that big highlighted headline text, that this is a plan where you have to put money in…
“No matter where you start this plan…
“The more money you put into it—the more you stand to get out.
“You don’t need a lot of money to get started, though.
“In fact, all it takes is about $22.
“Putting such small amount into this plan isn’t going to make you rich.
“But I can promise you this… it’s better than doing nothing.”
OK, so perhaps our results will be somewhere between “better than doing nothing” and “$1,003 a month in income” — what is it that he’s really teasing here? A couple other clues…
“… nearly $9 out of every $10 this company earns comes from ironclad contracts with the U.S. Government…
“This steady stream of guaranteed money has allowed it to make 30 payouts over the past 7 years without a single cut…
“And that it has earned the coveted ‘investment grade’ rating from both Moody’s and Standard & Poors…”
Well, as noted, he’s hinting at buying shares of a publicly traded stock — in this case, it’s Government Properties Income Trust (GOV), an externally managed REIT that’s run by REIT Management & Research (which is also public, ticker RMR)
Which did, in fact, pay out a total of $122.366 million in dividends in 2016, and a dramatically smaller number in 2009 (it had its IPO in mid-2009, so numbers from that year are a little misleading… but the total dividends paid number has climbed dramatically)… and it does get the vast majority of its income from leasing office space to government agencies.
And GOV has made 30 quarterly dividend payments without a cut (32 now, actually — the data here is a little bit old), and it was trading at about $22 a while back. Though the unstated bits are what makes this company seem a little bit less compelling — the dividend payment per share has not risen meaningfully in seven years (it was a 40 cents/quarter in 2009, got up to 43 cents in 2012, and has stayed there ever since), and the stock price has failed to do anything exciting… so although the total dividends paid have risen dramatically over the years, that’s because the share count has also risen dramatically.
The total return, for someone who bought at the IPO in mid-2009, has been pretty decent at 74% over now eight years, but that has been entirely from the dividend. And it only sounds decent if you don’t compare it to anything else — just buying the REIT index, using the Vanguard REIT ETF (VNQ), for example, would have given you a total return of 255% during that same time period.
What’s appealing about GOV? Really, it’s just the steady client base — government offices don’t often shut down or stop paying their rent.
What detracts from the appeal of GOV is that their dividend payout is so high that they can’t really afford it, so that puts some stress on the capital structure and takes away any real opportunity for the dividend to grow in the future. It still feels pretty nice, I’m sure, cashing a 9% dividend check, and that’s meaningful — but it’s hard to compound your money if the actual share price is mostly in a gradual decline (with some big ups and downs over the years, but it went public at $20 in 209 and routinely traded at $25 in 2010 and 2011, and now is in the $18s).
I’ve written about GOV many times, mostly because Lifetime Income Report has teased the stock about every six months for years now (usually using these same kinds of pitches about “taxing back the government” or profiting from a “little-known Social Security contract” — and each time I’ve come away with the same feeling: This REIT is managed for the benefit of its external manager as much as it is for shareholders, it seems to me, and I don’t like REITs that can’t increase their dividend or improve their per-share performance in other ways over time… even if the dividend is super-high, as GOV’s is.
The lack of per-share improvement is really hard to get past — they’ve posted funds from operations (FFO) per share of as high as $2.27 (that was back in late 2013), but that number is now at $1.29 and I don’t see any likelihood of it growing meaningfully (and yes, you noticed that the dividend payout of $1.72 is a lot higher than their FFO — FFO is a representation of the real “owner cash flow”, it’s real money before you take out depreciation and non-cash charges, so that’s what really drives the sustainable profitability of a real estate business). If you can’t make even slight improvements to per-share operations over time, what’s the point of trying to grow the company and add more shares and buy more buildings? (Aside, that is, from the wish to increase management fees for the outside managers?) Maybe if you dig into their operations and become a GOV expert you’ll find reason for optimism, but I think that 9% dividend, tempting though it is, is more likely to lead to disappointment than to riches.
I continue to find the smaller Easterly Government Properties REIT (DEA) more appealing if you want to own a government landlord — they’re not spectacular, but they’re steady and do grow the dividend a little bit… and can afford the dividend. It doesn’t hurt that DEA has given investors about a 46% gain over the past 2-1/2 years, while GOV has just barely done better than break even with a 2.5% gain after dividends. I don’t own DEA, either, but it is smaller and more sustainable-looking to me than GOV. [12/14/17 update: DEA has outpaced GOV since this was first published, with a total return of roughly 11% vs. 3.5% for GOV]
And, since I always like to loop back around to see what it would take to get the earnings these pitches tease in their headlines, here’s our math exercise: If you wanted to get $1,003 a month in earnings from GOV, that would mean you’d need to buy about 7,000 shares… so as of today, that would mean putting about $130,000 into a GOV position to get your quarterly $3,000 dividend check.
That dividend probably will continue to be paid, since they’ve kept it up for this long and they don’t seem to have any trouble borrowing money, but it’s probably not going to go up very much… and it could be cut a bit if GOV’s operating expenses (like their debt payments) go up considerably and put some pressure on their balance sheet in the future. I’m not predicting terrible things for GOV, to be clear, I just don’t see a lot of greatness in their future — if you’re going to invest in dividend-payers, buy the ones whose businesses are improving and that can increase the dividend over time, those you can almost “set and forget” and let the value compound while you’re not watching. The high yielders like GOV, on the other hand, the ones who pay dividends that they can’t cover with cash flow from their operations, those you have to watch closely and worry about the possibility that there will come a Friday evening when they cut the dividend in half and your shares lose much of their value instantly.
GOV pays such a high yield that I wouldn’t be surprised if they could make shareholders happier by liquidating and selling their properties to institutional investors, who often will happily buy leased office space with a 5% cash yield (real estate folks call that the “cap rate”)… but, well, that wouldn’t generate many fees for the outside manager (and I’m just being snarky, really, I don’t know if the buildings are actually worth more than the company’s enterprise value, and they do carry quite a bit of debt).
That’s what I think, at least — but it’s your money. Is a 9% dividend enough for you to own a mediocre company with great tenants? Like the diversification it might bring? Like just collecting rent from the Feds because it makes you feel better about paying taxes? Let us know with a comment below.
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