“Pure Income,” the “11% Promise” and the “Ultra-Dividend Stocks”

By Travis Johnson, Stock Gumshoe, December 20, 2012

The folks at the Sovereign Society launched a new newsletter services called Pure Income this week, with the first official recommendations apparently being released yesterday — and yes, the ads for the new letter teased us about those three ads … which means we want to know what they are now.

And no, we’re not going to shell out five hundred bucks for the privilege — this letter sounds like it’s focusing on a variety of different income strategies, mostly looking for lower risk, higher yield opportunities, but among the income-focused letters I’ve seen (like the 12% Letter, the Dividend Detective, Dividend Machine, etc.) it stands out as pretty expensive with a $495 “list price” … so perhaps they’re focusing on the smaller cap names, or making less liquid options sales part of their strategy and therefore limiting the subscriber list size … or just think they’re better, I don’t know.

The service is being helmed by Evaldo Albuquerque, whose name I’ve seen bouncing around for a year or two but who I’ve never written about before … and he’s apparently got a portfolio building up now of three particular “Ultra-Dividend Stocks” to buy now, plus a half dozen or so more that he’s got ready to recommend in the near future.

Here’s how Jeff Opdyke, one of the Sovereign Society editors, describes the strategy:

“… if we don’t show you an annual yield of least 11% over the next year – you won’t pay a dime for Evaldo’s advice and research.

“As I alluded to… this is not about risky stocks.

“This is not about low-yielding bonds, treasuries or CDs..

“And it’s definitely not a ‘get rich quick’ strategy.

“The premise is rather simple – provide readers with the absolute best opportunities to:

  1. Generate safe, steady, monthly income.
  2. Target stocks that at least triple the S&P 500 dividend paying stocks average.
  3. Earn an annual yield of at least 11%.

“The result, is an incredible one-stop income letter that shows you opportunities to quickly multiply your monthly income.

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“And because some of these stocks are Canadian companies, you could actually increase your portfolio’s overall diversification. Again, these stocks can reduce your risk more than if you just own shares of U.S. companies alone.”

Hard to complain about any of that, of course — though with “safety” and a dividend yield of better than 6% it’s going to be tough to be very diversified. A bit more:

“Right now, the highest yielding S&P 500 stock is an income death-trap.

“In fact, if you’re holding Windstream Corp. (NASDAQ: WIN) in your portfolio – get out NOW.

“There’s a reason it pays 9.30% right now… and it isn’t because business is booming.

“Quite the opposite, sales are weak, earnings are vanishing, and its debt-burden is growing by the day. All indicators are screaming – avoid at all costs.

“But it’s not alone, the next two top yielding S&P stocks, Pitney Bowes (NYSE: PBI) and R.R. Donnelly & Sons (NASDAQ: RRD) don’t look any better.

“I urge you not to be tempted by high yields alone. It’s likely these dividends – and the stocks – will soon disappear.

“My point is, you can’t simply pick stocks based on high yields… it doesn’t always mean you’ll get monthly checks in your pocket.

“That’s why Evaldo has developed Pure Income.

“To show you which high-yielding stocks to buy, and which ones to avoid like the plague.”

And as I said, we do get teased about the first three specific “Ultra-Dividend Stocks” that are being recommended … this universe of high-yielding stocks (these apparently average 8-9% right now, per the ad) is not that large, so I bet we’ll have heard of them all and maybe even written about them before.

But we won’t know until we look, will we? Here are the clues:

“The burger business is booming in Canada. This company has added 200 restaurants in the last 5 years and has had a remarkable 27 consecutive quarters of same store sales growth. Its dividend currently pays 39-times more than treasuries. But here’s the thing, this unusual investment doesn’t own and operate a single restaurant. Its sole business is to collect – and then distribute in the form of dividends – royalties from the burger and beverage trademarks it owns and the franchises it sells.”


OK, so yes, we’ve heard of this little fella before — this is the A&W Revenue Royalties Income Fund (AW.UN in Toronto, AWRFF on the pink sheets). We wrote about this one just over a year ago when Roger Conrad teased it for his Canadian Edge letter, as he has done several times in the past five or six years. You can see that older article here, and frankly the company hasn’t changed much — it’s hard to call it a “dynamo” as Conrad did at the time, but the stock is up a little bit and the yield remains similar, they pay out 11.7 cents/month for a current yield of just under 7%. What do they do? Short answer: They own the A&W Root Beer trade marks in Canada, and collect a 3% royalty from the chain restaurants in their royalty pool — which currently stands at 760 restaurants.

They can’t grow distributions unless the restaurants start doing better, so that’s the metric that matters the most — they can and do grow the size of the royalty pool most years as new stores are opened (and fewer, usually, are closed), but they also have to issue new partnership units to “buy” the royalties for those stores, so it doesn’t necessarily add fuel to the per-share distributions unless the stock happens to be really beaten down. I don’t know how the A&W restaurant chain is doing in Canada, they’re a much bigger brand north of the border than they are in New England or most of the US, but if the restaurants are in decent shape and can put any revenue growth together then this royalty fund should do just fine and outpace inflation — they have raised the distribution a few times, but not very dramatically, so there’s not much proven growth but it is an extremely high margin business so any good performance at the restaurants should make it down to the shareholders pretty quickly. That’s an “if” in the middle there, to reiterate, I know nothing about the sales growth that might be expected from A&W restaurants in Canada.

And the next one?

“A provider of school bus transportation services with over a half billion in market cap. With 9,000-plus vehicles in more than 200 school districts its one of the largest student transportation company in North America. It pays a hefty 8.2% dividend and it monthly.”

Hmmm… yep, another one we’re familiar with — this is Student Transportation (STB), which we covered most recently for a Roger Conrad tease back in April. The stock has been very volatile since then, and is currently down a bit, but still carries that fat monthly yield that attracts investors (currently it’s almost 9%). They seem to still be doing pretty well operationally, with good renewals on contracts over the past year and some good new contract wins, like the deal for some big Nebraska school districts that starts next Summer … but they are also, despite their growing size, a consistent burner of cash thanks to their heavy need to invest in new equipment and facilities.

They don’t generate enough cash flow from operations to cover their needs (ie, they’ll need to buy 400 buses for those Nebraska contracts), so they continue to gradually ramp up the debt and sell more stock. The revenues are growing, so there ought to be some potential for the company to become more operationally efficient and get some economies of scale, but that is admittedly fairly tough to do with a business like student busing — the buses sit idle much of the time, and there isn’t a whole lot you can do to change that. They can probably get better pricing on buses and financing than local school districts or small local operators, and they can consolidate things like maintenance and personnel management/overhead stuff, but they haven’t so far shown that their myriad acquisitions and new contract wins can make them free-cash-flow-positive on a regular basis.

So if you’re an optimist you’ll see opportunity in their ability to shave off a bit more costs, and a solid yield with a growing revenue base and a large recurring revenue stream, all from a company that should benefit from the need of local governments to outsource to cut costs … if you’re a pessimist you’ll see that the company carries a growing pile of debt and has very tight profit margins, and that since it looks like they have heavy investment requirements for each added dollar of revenue you can’t necessarily just increase revenues and “make it up on volume.”

It’s hard to bet against a 9% yield, and they have consistently paid that monthly dividend for many years now, but it’s also easy to see that it wouldn’t take much of a chink in their armor to really hurt the share price — debt concerns helped to slash the shares in half during the financial crisis, but absent big problems like that the shares will probably be pretty steady as they appeal to the yield-starved but it’s hard to picture the stock getting any real capital gains … I’d wager that you wouldn’t buy this stock if it had a 5-6% yield, since such yields are on offer from far larger and more stable companies, and there isn’t any history of increasing that dividend over the past five years, so that will probably keep a damper on the shares.

One more?

“A Texas-based investment firm with a market cap near $1 billion. It operates in a unique niche that offers customized debt and equity financing to “middle market” companies in diverse industries with annual revenues between $10 and $150 million. It pays a scorching monthly dividend that triples S&P stocks.”

Well, “tripling S&P stocks” only means you’re in the neighborhood of a 6% yield … which ain’t bad, of course. This one I’ve only written about once, I think, when Mark Skousen was pitching it for his Forecasts and Strategies letter as a good play on … the Romney presidency. So Skousen’s forecasting in that respect maybe wasn’t terribly accurage, but the stock has been on a tear.

This is almost certainly Main Street Capital (MAIN), a Texas business development company (BDC). BDC’s are basically similar to REITs or MLPs, pass-through investments that don’t have to pay taxes as long as they pass the income along to individual shareholders (who then will presumably pay those taxes) — BDCs were created in tax law to help funnel money to small businesses so, like pretty much all other BDCs, MAIN makes money by lending money to or investing in “middle market” companies, companies that are too big for the neighborhood bank and too small for Wall Street.

MAIN has been a good one, growing the distribution nicely, including a nice special dividend that they’ll pay in January, and unlike most BDCs they do pay their dividend monthly (though they declare it quarterly, it seems — so the next three dividends are predictable, you’d get the special dividend of 35 cents in January and then 15 cents per month for January-March, a total of 80 cents for the quarter). That gives an effective yield of over 10% if you annualize it, but since we don’t know if they’ll pay more special dividends a more conservative projection would be a 7.1% yield going forward. They’ll probably raise the distribution at some point in 2013, since they do so in most years, so that’s probably low.

I am certainly not an expert on MAIN or the other BDCs and their current business performance, but MAIN’s stock has done extremely well for the past several years and is at a high — I’d be a bit more comfortable with this one than I am with the other two ideas proposed by Albuquerque, despite the fact that recessions, if you foresee one, tend to hit mid-sized leveraged companies quite badly. There are also several other BDCs to consider if you’re interested in this segment, they do generally tend to trade together but MAIN has been one of the stronger ones lately — there’s one recent article about a few of them here at Seeking Alpha that I found interesting, though I don’t currently have any investments in this sector.

So there you have it — three high-yielding income ideas from the Pure Income folks to launch their new letter … anything stand out as tasty to you, or do you have other high yield picks that you’d like to crow about? Let us know with a comment below.


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jfenlin
Irregular
jfenlin
December 20, 2012 4:08 pm

Why fiddle around when one can buy SDRL.
Yes there is financial engineering but very good assets with very good management well postioned for secular trends makes sense to me. The market might actually decide that a 5-6% is appropriate. Just not feeling much further capital appreciation in the 3 “Pure Income” names reviewed (so I cant complain about the title of the letter) and see at least as much downside risk from these as SDRL. SDRL is S&P 500 size but won’t be in it anytime soon.

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petergregg
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petergregg
December 20, 2012 4:27 pm

What is the A&W symbol? i can find AWRRF – is that the right one by any chance?

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Terry Waggoner
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Terry Waggoner
December 26, 2012 10:05 am
Reply to  petergregg
Craig Stelck
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Craig Stelck
December 20, 2012 4:28 pm

I’ve decided the best way to make money is get insider trading tips from Nancy Pelosi or one of her sock puppets like my congressman in Pleasanton. What could be better?

Tarzan Leather-Chaps
Member
Tarzan Leather-Chaps
December 20, 2012 4:38 pm

Would not touch any of these 3. EEP at almost 8%, yes, NMM maybe on a drop.

Thanks, TL-C

germain
Member
germain
December 20, 2012 4:55 pm

Its on Toronto exchange: AW.UN
Check out http://www.theglobeandmail.com/globe-investor/markets/stocks/summary/?q=AW.UN-T
if you are still having trouble

Doug W
Irregular
December 20, 2012 5:22 pm

Income investors might look at BREUF. Steady Candian royalty model. Well managed.

Don’t have much sense of the BDC’s but tend to be wary of chronic share issuers. But this might be one of those times where they are filling a niche (mid mkt financing) vacated by the banks, and can actually get decent ROIs on new money. I don’t think they are stocks you can tuck away and forget about though.

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Duncan
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Duncan
December 20, 2012 5:48 pm

These examples must illustrate new math. How can you guarantee 11% return hawking equities that pay 7-8%? The deficit must be in appreciation, but the name implies dividend income.

I wonder if they automatically refund your subscription if they fail to perform as promised. Now that would be a guarantee.

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John Green
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John Green
February 13, 2013 3:58 pm

Yup, out of the money calls are very cheap on high dividend stocks, so its hard to make much money selling calls on them.

John
Irregular
December 20, 2012 6:22 pm