Ultra Dividends, Sovereign Investor

7/28/2019 Ultra Dividends, Sovereign Investor

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A Publication of The Sovereign Society

Fighting the Fed withUltra-Dividends

By Evaldo Albuquerque, Investment Reserch Analyst,

Editor of Pure Income and Retirement Strategist

Te Sovereign Investor

55 N.E. 5th Avenue, Suite 200

Delray Beach, FL 33483 USA

USA oll Free el: (888) 358-8125

Contact: http://sovereign-investor.com/contact-us/

Website: http://sovereign-investor.com/


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A Better Way to Generate Income

Many people consider treasuries, CDs and other money market accounts sae ways to save or the uture.

But investing in those assets today isnt any better than keeping your money under the mattress.

Tanks to the Feds interest-rate policy, traditional sources o income pay next to nothing. o make matters worse,ination is higher than interest rates. So i you have cash in money market accounts, youre losing purchasing powerevery single year.

Five years ago, i you had invested $100,000 in a six-month CD, or example, you would have generated an annualincome o roughly $5,000. oday, the same CD generates just $750 in annual income.

And with ocial ination at 2%, that same $100,000 will only be worth $98,000 in one year. In other words, theextremely low income generated rom CDs wont protect you against ination.

Tats why Ive spent the last ew months looking or quality alternative sources o income.

My research has led me to a group o stocks that pay what I call ultra-dividends.

I call them this because, unlike blue-chips which pay quarterly dividends many o these companies pay dividends

every single month.Using these stocks, I was able to develop a sae strategy that guarantees an 11% annual yield. Tats more than vetimes what the S&P 500 currently pays, and more than 14 times the income you can get rom CDs.

In todays zero-interest rate world, many investors eel they have no choice but to seek out riskier assets that oferhigher income. Unortunately, many end up alling into a yield trap.

For example, you may be tempted to invest in a company that pays a relatively high dividend. But i the company isin poor nancial shape, it may have to cut its dividend.

When that happens, you get hit with a double whammy. Not only will you lose the income, youll also sufer a bigcapital loss because stocks oten plunge ater dividend cuts.

Te strategy Ive developed ofers a double-digit yield, while avoiding that yield trap. Im talking about the kind oinvestments that deliver steady income payouts that will help you nance your retirement and enhance your liestyle

Beore I tell you more about that strategy, let me show you why traditional sources o income will no longer help youachieve your nancial goals.

5.5% is the Key Number

As you know, the Fed has promised to keep interest rates close to zero at least until 2015. So money market accountswont provide any income at least or the next three years.

But I think low rates will persist or much longer than anyone thinks. Interest rates are likely to remain close to zerountil the end o this decade.

Te Fed announced it will start hiking rates only ater they see a substantial improvement in the labor market. Whatexactly does that mean?

Well, some members o the Fed have expressed their opinions.

Chicago Fed President Charles Evans, or example, thinks the Fed needs to see U.S. employers adding 200,000 ormore jobs a month or at least two quarters. Te last time the economy had that kind o consistent jobs growth wasback in 2005 and early 2006.


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At that time, the economy was booming because o the housing and credit bubble. It will be extremely hard to replicate that kind o employment growth.

Minneapolis Fed President Narayana Kocherlakota has also given his opinion recently. He said the Fed should keeprates at zero until the unemployment rate has allen below 5.5%.

Since peaking at 10% in January o 2010, the unemployment rate has allen to 7.8%. In almost three years, the ratedropped a little more than two percentage points. As this pace, the economy will take another our years to reach that5.5% threshold. Tat suggests zero rates until late 2016.

And this assumes economic growth wont slow down. But thats a big assumption.

A Decade of Zero Interest Rates

Economists Carmen Reinhart and Kenneth Rogof have analyzed dozens o other nancial crises similar to the one wehad in 2008. Tey concluded that once a countrys debt-to-gross domestic product (GDP) ratio crosses above 90%growth rates tend to all by 1% on average.

Well, guess what? Our current debt-to-GDP ratio is 103% (and rising). Weve already crossed that threshold. As aresult, our economy is growing 1% less than it used to.

Our economy grew on average 3% between 2004 and 2006, or example. But since 2010, it has had annual averagegrowth o just 2%. Because o our massive debt, the economy is unlikely to experience consistent growth above 3%in the next ew years.

Without strong growth, job creation is likely to remain pretty weak. And this will make the Fed hold rates close to zeroor much longer than anyone thinks.

More importantly, with growth so close to zero, it doesnt take much or the economy to dip into another recession.Tats like a plane ying at a low altitude. Any turbulence may be enough to cause a crash.

Historically, the economy goes through a recession every our to six years. Our last recession ocially ended in June o

2009. Based on the historical average, we should have another recession between 2013 and 2015. Another recessionwould certainly push unemployment higher, urther delaying a rate hike rom the Fed.

In sum, there are very good reasons to believe the Fed will keep rates at zero until at least the end o this decade. Buzero interest rates is not the only problem income investors ace. Te Fed is also punishing savers through ination.

The Real World Inflation Rate

While the Fed wants you to believe ination is low, the rising costs o everyday items, such as gasoline and ood, sug-gests otherwise. In the past year, Ive noticed a signicant increase in my grocery bill. Im sure youve noticed the same.

Tat makes me skeptical o the Feds low ination numbers.

Tats why Im a big an o John Williams o Shadowstats.com. He keeps track o key economic data using real worldmethodologies. He publishes honest numbers, as opposed to the antasy world numbers the Fed publishes.


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The True Inflation Rate is Close to 10%

1980 1990 2000 2010-5%

0%

5%

10%

15%

True Inflation(Based on a Fixed Basket of Goods)

Inflation Reported by the

Government

Te ocial ination rate, or example, is 2%. But, using methodologies that were in place prior to 1980 beore theFed started tinkering with the numbers Williams shows the actual ination rate today is close to 10%.

Beore 1980, the government used to measure ination with a xed basket o goods and services. But thats no longer

the case.

Bureaucrats are constantly changing the CPI (Consumer Price Index) basket o goods and services according to whathey deem appropriate. Let me give you an example o one o the many tricks the Fed uses.

Te ocial measure o ination assumes consumers switch spending rom higher priced goods to those that are stableor alling. For example, i the price o steak goes up, the government assumes you will start eating ground bee. So itreplaces steak or ground bee in its basket o goods.

Isnt that a nice trick? No wonder ination is always low or the Fed.

Te truth is the Feds ocial ination is a big lie. Tats like adjusting your clock just to make it look like youre not late

or a meeting. Or tinkering with the scale just to make it look like youve lost a ew pounds, when in act youve gained.

By replacing goods that rise in price or cheaper ones, the Fed is able to keep the ocial measure o ination low, de-spite the clear loss o purchasing power.

Te Feds measure o ination is essentially meaningless. But i you still believe ination is just 2%, as the Fed claimscheck out the chart below. It shows the price increases o some key items over the past three years. Tat doesnt looklike low ination to me.

Inflation is Much Higher Than the Fed Claims

20102009 2011 2012-20%

20%

40%

60%

80%

120%

140%

100%

0%

Corn

Wheat

Milk

Gasoline


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With interest rates close to zero and rising ination, you have to walk away rom money market accounts and CDsIts the only way you will have a chance o getting an income high enough to preserve your standard o living.

Tats why Ive been researching alternative income streams.

Fighting the Fed with Ultra-Dividends

In act, whats great about these stocks is they ofer a sae way to generate more income than you can get rom tradi-

tional income sources.

Te company I believe would make a ne addition to any income-seekers portolio is an energy play. Its the second-largest natural gas gatherer and processor in the United States.

Te recent discovery o a massive supply o shale gas in the U.S. has created a huge demand or inrastructure, such asprocessing plants and pipelines. As a logistics company, this ultra-dividend play will benet rom this trend.

DCP Midstream (NYSE: DPM) is a natural gas master limited partnership (MLP).

Tis is how MLPs work. When you own shares o a traditional stock, the companys prots are taxed, and then what-ever dividends it distributes to you are taxed, as well its an unair system o double taxation that Congress reuse

to x but which MLPs avoid.

Unlike corporations that have shareholders, MLPs have partners. Tat structure means the MLP itsel doesnt pay cor-porate taxes. Instead, it passes the prots along to its partners/shareholders who are responsible or paying the taxesTus, with an MLP you dont receive a dividend you, as a partner, receive distributions during the year or yourshare o the partnerships net prots.

Tat matters because it has tax ramications. Most traditional dividends are eligible or the current 15% dividend taxrate. MLP distributions are not. You ultimately pay taxes at whatever your ordinary, personal income-tax rate is. Tatsounds like youre losing out, since most personal tax rates are higher than 15%. But thats not necessarily the case.First, you have to adjust or the act that the money wasnt taxed at the corporate level. Tat means more cash is avail-able or partners, so your distribution is larger than it would be with a dividend.

Second, a portion o your distribution is considered a return o capital. Tats not taxable income. Tat portion de-ned as return o capital is subtracted rom your original cost basis, efectively lowering your cost. Tat comes intoplay when you sell your shares. Te lower cost basis increases your prots, so you will pay taxes on larger prots. Someo your gains will come rom capital gains and will be taxed at existing capital-gains tax rates some will be romdeductions such as depreciation, and those will be taxed as ordinary income.

Its all sounds more complicated than it is. Te MLP will send you a K-1 each year, usually in February or March,and it lays out everything or you or your accountant. Finally, beware o holding MLPs in a 401(k) or IRA. Tere arespecial rules or retirement accounts that could cause problems in some instances. So, check with your account beoreyou put an MLP in your retirement plan.

MLPs are required by law to pass on ree cash-ow to shareholders in the orm o dividends. Tats what makes thema good source o income.

But some energy MLPs can be risky because their earnings depend on the price o the commodity they produce. Tisis NO the case with DCP.

It has very little exposure to uctuation in commodity prices. More than 85% o its prots are ee-based or supportedby commodity hedges.

A ee-based model makes prots more dependent on the volume that goes through the pipelines, and not on the priceo natural gas. By hedging a portion o its production, the company also reduces its exposure to price uctuations.


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Tats what makes DCP saer than many other MLPs.

Tis also allows it to pay steady dividends.

As you can see above, since initiating its dividend in 2005, DCP has paid dividends every single year, even during the2008 market crash. It currently pays a yield o 5.7%, almost three times higher than what the S&P 500 currently paysTe company also has a dividend growth target o 6%-10% or 2013 and 2014.

Its these stable and growing distributions that make DCP a much better source o income than reasuries, money

market accounts or blue-chips. BuyDCP Midstream (DPM) up to $48.

Although DCP pays quarterly dividends, many o the ultra-dividend stocks pay monthly income.

Stay tuned

Evaldo Albuquerque

P.S. Tanks or signing up or the FREE newsletter Te Sovereign Investor, where we bring you the best investingadvice and opportunities out thereand I mean that. o hear our latest investment predictions, visit me and the resto the team at http://www.sovereign-investor.com.

About the Author:

Evaldo is one o the top nancial analysts and a Chartered Market echnician (CM), whos been able to tap intothe best opportunities to generate sae, steady monthly income. Evaldo provides insight and analysis to help investorsquickly multiply their monthly income and earn an annual yield o at least 11%. He also provides retirement wealthbuilding strategies and portolio allocation or retirement accounts.


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