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A Publication of The Sovereign Society

Fighting the Fed with Ultra-Dividends


By Evaldo Albuquerque, Investment Reserch Analyst, Editor of Pure Income and Retirement Strategist

The Sovereign Investor 55 N.E. 5th Avenue, Suite 200 Delray Beach, FL 33483 USA USA Toll Free Tel: (888) 358-8125 Contact: http://sovereign-investor.com/contactus/ Website: http://sovereign-investor.com/

A Better Way to Generate Income Many people consider treasuries, CDs and other money market accounts safe ways to save for the future. But investing in those assets today isnt any better than keeping your money under the mattress. Thanks to the Feds interest-rate policy, traditional sources of income pay next to nothing. To make matters worse, inflation is higher than interest rates. So if you have cash in money market accounts, youre losing purchasing power every single year. Five years ago, if you had invested $100,000 in a six-month CD, for example, you would have generated an annual income of roughly $5,000. Today, the same CD generates just $750 in annual income. And with official inflation at 2%, that same $100,000 will only be worth $98,000 in one year. In other words, the extremely low income generated from CDs wont protect you against inflation. Thats why Ive spent the last few months looking for quality alternative sources of income. My research has led me to a group of stocks that pay what I call ultra-dividends. I call them this because, unlike blue-chips which pay quarterly dividends many of these companies pay dividends every single month. Using these stocks, I was able to develop a safe strategy that guarantees an 11% annual yield. Thats more than five times what the S&P 500 currently pays, and more than 14 times the income you can get from CDs. In todays zero-interest rate world, many investors feel they have no choice but to seek out riskier assets that offer higher income. Unfortunately, many end up falling into a yield trap. For example, you may be tempted to invest in a company that pays a relatively high dividend. But if the company is in poor financial 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 suffer a big capital loss because stocks often plunge after dividend cuts. The strategy Ive developed offers a double-digit yield, while avoiding that yield trap. Im talking about the kind of investments that deliver steady income payouts that will help you finance your retirement and enhance your lifestyle. Before I tell you more about that strategy, let me show you why traditional sources of income will no longer help you achieve your financial 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 accounts wont provide any income at least for the next three years. But I think low rates will persist for much longer than anyone thinks. Interest rates are likely to remain close to zero until the end of this decade. The Fed announced it will start hiking rates only after they see a substantial improvement in the labor market. What exactly does that mean? Well, some members of the Fed have expressed their opinions. Chicago Fed President Charles Evans, for example, thinks the Fed needs to see U.S. employers adding 200,000 or more jobs a month for at least two quarters. The last time the economy had that kind of consistent jobs growth was back in 2005 and early 2006. 2

At that time, the economy was booming because of the housing and credit bubble. It will be extremely hard to replicate that kind of employment growth. Minneapolis Fed President Narayana Kocherlakota has also given his opinion recently. He said the Fed should keep rates at zero until the unemployment rate has fallen below 5.5%. Since peaking at 10% in January of 2010, the unemployment rate has fallen to 7.8%. In almost three years, the rate dropped a little more than two percentage points. As this pace, the economy will take another four years to reach that 5.5% threshold. That 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 Rogoff have analyzed dozens of other financial crises similar to the one we had in 2008. They concluded that once a countrys debt-to-gross domestic product (GDP) ratio crosses above 90%, growth rates tend to fall by 1% on average. Well, guess what? Our current debt-to-GDP ratio is 103% (and rising). Weve already crossed that threshold. As a result, our economy is growing 1% less than it used to. Our economy grew on average 3% between 2004 and 2006, for example. But since 2010, it has had annual average growth of just 2%. Because of our massive debt, the economy is unlikely to experience consistent growth above 3% in the next few years. Without strong growth, job creation is likely to remain pretty weak. And this will make the Fed hold rates close to zero for much longer than anyone thinks. More importantly, with growth so close to zero, it doesnt take much for the economy to dip into another recession. Thats like a plane flying at a low altitude. Any turbulence may be enough to cause a crash. Historically, the economy goes through a recession every four to six years. Our last recession officially ended in June of 2009. Based on the historical average, we should have another recession between 2013 and 2015. Another recession would certainly push unemployment higher, further delaying a rate hike from the Fed. In sum, there are very good reasons to believe the Fed will keep rates at zero until at least the end of this decade. But zero interest rates is not the only problem income investors face. The Fed is also punishing savers through inflation. The Real World Inflation Rate While the Fed wants you to believe inflation is low, the rising costs of everyday items, such as gasoline and food, suggests otherwise. In the past year, Ive noticed a significant increase in my grocery bill. Im sure youve noticed the same. That makes me skeptical of the Feds low inflation numbers. Thats why Im a big fan of John Williams of Shadowstats.com. He keeps track of key economic data using real world methodologies. He publishes honest numbers, as opposed to the fantasy world numbers the Fed publishes.

The True Inflation Rate is Close to 10%


True Inflation
15%

(Based on a Fixed Basket of Goods)

10% 5%

Inflation Reported by the Government


1980 1990 2000 2010

0%

-5%

The official inflation rate, for example, is 2%. But, using methodologies that were in place prior to 1980 before the Fed started tinkering with the numbers Williams shows the actual inflation rate today is close to 10%. Before 1980, the government used to measure inflation with a fixed basket of goods and services. But thats no longer the case. Bureaucrats are constantly changing the CPI (Consumer Price Index) basket of goods and services according to what they deem appropriate. Let me give you an example of one of the many tricks the Fed uses. The official measure of inflation assumes consumers switch spending from higher priced goods to those that are stable or falling. For example, if the price of steak goes up, the government assumes you will start eating ground beef. So it replaces steak for ground beef in its basket of goods. Isnt that a nice trick? No wonder inflation is always low for the Fed. The truth is the Feds official inflation is a big lie. Thats like adjusting your clock just to make it look like youre not late for a meeting. Or tinkering with the scale just to make it look like youve lost a few pounds, when in fact youve gained. By replacing goods that rise in price for cheaper ones, the Fed is able to keep the official measure of inflation low, despite the clear loss of purchasing power. The Feds measure of inflation is essentially meaningless. But if you still believe inflation is just 2%, as the Fed claims, check out the chart below. It shows the price increases of some key items over the past three years. That doesnt look like low inflation to me. Inflation is Much Higher Than the Fed Claims

Corn Wheat Gasoline

140% 120% 100% 80% 60% 40% 20%

Milk
2009 2010 2011 2012

0% -20%

With interest rates close to zero and rising inflation, you have to walk away from money market accounts and CDs. Its the only way you will have a chance of getting an income high enough to preserve your standard of living. Thats why Ive been researching alternative income streams. Fighting the Fed with Ultra-Dividends In fact, whats great about these stocks is they offer a safe way to generate more income than you can get from traditional income sources. The company I believe would make a fine addition to any income-seekers portfolio is an energy play. Its the secondlargest natural gas gatherer and processor in the United States. The recent discovery of a massive supply of shale gas in the U.S. has created a huge demand for infrastructure, such as processing plants and pipelines. As a logistics company, this ultra-dividend play will benefit from this trend. DCP Midstream (NYSE: DPM) is a natural gas master limited partnership (MLP). This is how MLPs work. When you own shares of a traditional stock, the companys profits are taxed, and then whatever dividends it distributes to you are taxed, as well its an unfair system of double taxation that Congress refuses to fix but which MLPs avoid. Unlike corporations that have shareholders, MLPs have partners. That structure means the MLP itself doesnt pay corporate taxes. Instead, it passes the profits along to its partners/shareholders who are responsible for paying the taxes. Thus, with an MLP you dont receive a dividend you, as a partner, receive distributions during the year for your share of the partnerships net profits. That matters because it has tax ramifications. Most traditional dividends are eligible for the current 15% dividend tax rate. MLP distributions are not. You ultimately pay taxes at whatever your ordinary, personal income-tax rate is. That sounds like youre losing out, since most personal tax rates are higher than 15%. But thats not necessarily the case. First, you have to adjust for the fact that the money wasnt taxed at the corporate level. That means more cash is available for partners, so your distribution is larger than it would be with a dividend. Second, a portion of your distribution is considered a return of capital. Thats not taxable income. That portion defined as return of capital is subtracted from your original cost basis, effectively lowering your cost. That comes into play when you sell your shares. The lower cost basis increases your profits, so you will pay taxes on larger profits. Some of your gains will come from capital gains and will be taxed at existing capital-gains tax rates some will be from deductions such as depreciation, and those will be taxed as ordinary income. Its all sounds more complicated than it is. The MLP will send you a K-1 each year, usually in February or March, and it lays out everything for you or your accountant. Finally, beware of holding MLPs in a 401(k) or IRA. There are special rules for retirement accounts that could cause problems in some instances. So, check with your account before you put an MLP in your retirement plan. MLPs are required by law to pass on free cash-flow to shareholders in the form of dividends. Thats what makes them a good source of income. But some energy MLPs can be risky because their earnings depend on the price of the commodity they produce. This is NOT the case with DCP. It has very little exposure to fluctuation in commodity prices. More than 85% of its profits are fee-based or supported by commodity hedges. A fee-based model makes profits more dependent on the volume that goes through the pipelines, and not on the price of natural gas. By hedging a portion of its production, the company also reduces its exposure to price fluctuations. 5

Thats what makes DCP safer than many other MLPs. This 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 the 2008 market crash. It currently pays a yield of 5.7%, almost three times higher than what the S&P 500 currently pays. The company also has a dividend growth target of 6%-10% for 2013 and 2014. Its these stable and growing distributions that make DCP a much better source of income than Treasuries, money market accounts or blue-chips. Buy DCP Midstream (DPM) up to $48. Although DCP pays quarterly dividends, many of the ultra-dividend stocks pay monthly income. Stay tuned

Evaldo Albuquerque P.S. Thanks for signing up for the FREE newsletter The Sovereign Investor, where we bring you the best investing advice and opportunities out thereand I mean that. To hear our latest investment predictions, visit me and the rest of the team at http://www.sovereign-investor.com.

About the Author: Evaldo is one of the top financial analysts and a Chartered Market Technician (CMT), whos been able to tap into the best opportunities to generate safe, steady monthly income. Evaldo provides insight and analysis to help investors quickly multiply their monthly income and earn an annual yield of at least 11%. He also provides retirement wealth building strategies and portfolio allocation for retirement accounts.

The Sovereign Investor 55 N.E. 5th Avenue, Suite 200 Delray Beach, FL 33483 USA USA Toll Free Tel: (888) 358-8125 Contact: http://sovereign-investor.com/contact-us/ Website: http://sovereign-investor.com/ Legal Notice: This work is based on what weve learned as financial journalists. It may contain errors and you should not base investment decisions solely on what you read here. Its your money and your responsibility. Nothing herein should be considered personalized investment advice. Although our employees may answer general customer service questions, they are not licensed to address your particular investment situation. Our track record is based on hypothetical results and may not reflect the same results as actual trades. Likewise, past performance is no guarantee of future returns. Certain investments such as futures, options, and currency trading carry large potential rewards but also large potential risk. Dont trade in these markets with money you cant afford to lose. Sovereign Offshore Services LLC expressly forbids its writers from having a financial interest in their own securities or commodities recommendations to readers. Such recommendations may be traded, however, by other editors, Sovereign Offshore Services LLC, its affiliated entities, employees, and agents, but only after waiting 24 hours after an internet broadcast or 72 hours after a publication only circulated through the mail. Please note that due to our commercial relationship with EverBank, we may receive compensation if you choose to invest in any of their offerings. (c) 2013 Sovereign Offshore Services LLC. All Rights Reserved; protected by copyright laws of the United States and international treaties. This Report may only be used pursuant to the subscription agreement. Any reproduction, copying, or redistribution, (electronic or otherwise) in whole or in part, is strictly prohibited without the express written permission of Sovereign Offshore Services, LLC. 55 NE 5th Avenue, Suite 200, Delray Beach FL 33483.

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