The S&A Digest: The Safest Dividends to Grab

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/01/2013

Ian on Dividends... Tommy on kids... Jeff Clark as "God King"... What's Agora Inc?... Van Tharp ranks us No. 1 and No. 2... Strange e-mails... A tough first quarter...

In today's essay (below), Ian looks at the dividend data again and finds some special dividends are better than others. If you haven't subscribed to our new S&A Dividend Grabber yet, you only have a few more hours to get our introductory, "half off" price.

"Brought you some venison," Tommy said when he stopped by on Saturday.

Long-time readers know Tommy is our mailman and sometime-handyman. He also shoots a lot of deer, maybe even a few more than the game warden would allow. From a white garbage bag, he pulled out six roasts, three or four tenderloins, and another dozen sausages, steaks, and backstraps. It was probably 30 pounds of deer meat. "Yeah, I hadda 'borrow' some firewood from you guys de odder day... so I figure I oughta pay you back with tha deer I got from back der."

"Tommy, that's a lot of meat. Thank you very much... Did you hear our good news? Andrea is going to have a baby this summer."

"Oh, yeah? Kids, uh? Well, I'm not much good with kids. My wife is always tellin' me, Tommy don't beat on the kids so much. I dunno, I think I'm too rough with 'em or something."

Signs of a market top: Non-bank lenders, such as hedge funds, accounted for $400 billion of loans at the end of last year, or two-thirds of the high-yield bond market. That number is up tenfold from a decade ago.

Signs of a market bottom: S&P 500 stocks are yielding 6.53% (including share buybacks), versus just 4.65% for 10-year T-bills. This gap is the widest it has been in 20 years, signaling a buy for some top money mangers including BlackRock, Fisher Investments, and Schroders.

Mutual funds averaged a 2.1% return for the first quarter of 2007. Although the average beats the 0.18% return of the S&P 500, it does not come close to the 12.9% return in the fourth quarter of 2006.

How have we done? Our model portfolio (the S&A 16) is down 2% since January. On the other hand, the S&A 16 selected last April is up 18%. We're selecting a new S&A 16 now, and Alliance members will receive it this week. (Each quarter, managing editor Brian Hunt and I select a balanced portfolio of 16 stocks from our list of all recommended stocks. The S&A 16 is designed to help Alliance members narrow down what stocks to buy now. It also represents a fair measure of our advice, as the S&A 16 is "fully invested.")

Another big deal... private-equity firm Kohlberg Kravis Roberts will purchase credit-card and payments processor First Data Corp. for $29 billion. KKR will pay $34 a share, or a 26% premium to Friday's close of $26.90.

Conspiracy theorists pay attention... Of the 170,000 U.S. gas stations, only 0.6% stock E85 ethanol. Big Oil makes it next to impossible to sell ethanol from their branded service stations. To get around the hurdle, ethanol producers are targeting retailers like Kroger and Wal-Mart.

New highs: Anglo American (AAUK), Kayne Anderson (KYN), Annaly (NLY), Telstra (TLS).

We set a record for positive feedback in the mailbag over the weekend. Hundreds of you, apparently, took the hint from Jeff Clark and established a position in the call options of Dendreon. Says one subscriber, "Jeff is a God King in my book... I made $10,550... in less than 48 hours." Enjoy the profits. You've earned them. And Jeff, never forget you're only as good as your last pick.

Send your feedback here: feedback@stansberryresearch.com. (Please understand, it's not possible for us to respond to all of your e-mails individually. We reply to a sample below. For customer service, please give us a call at 888-261-2693.)

"Did you send me an e-mail from Pirate Investor?? Who are they?" – Alliance member Joseph Cisar

Porter comment: As you know, we've got gremlins in our web systems... and we can't seem to kill them all. They keep coming back to life... like the whack-a-mole game. In the latest snafu, we inadvertently re-sent to all of our S&A Alliance members (our top-level customers) an e-mail from three years ago, when we were still known as Pirate Investor. We certainly regret the confusion that it must have caused folks. Meanwhile in our I.T. department, the finger pointing and blame game are reaching new highs...

How to solve the problem? We will have an entirely new website in place, running on new hardware and with new software, in the next 90 days. Until then, please bear with us.

"I am a new subscriber and seem totally lost. I thought I was going to get some monthly stock recommendations that I could possibly use, but instead I seem to get a bunch of reports from other analysts that want me to buy their newsletters. When I look at the recommended companies, the most current is first of February. It's the end of March. Am I misreading the daily information that I get or is this it?" – Paid-up subscriber Jerry

Porter comment: Jerry, please look at our website. Which publication did you subscribe to? Click on that letter. Enter in your user name and your password. You'll find a complete list of all monthly publications and all special reports. Although I don't know what letter you've subscribed to, there should be a March issue available. If you have any further questions, please call our customer service team. And, if you don't wish to receive our free daily e-letters, you many cancel them without canceling your investment subscription.

"You may justify and attempt to mystify the rationale of writing for others, but writing term papers for others is still full-blooded fraud. I thought that your lame brained attempt to deny global warming in the face of insurmountable evidence was intellectually dishonest; but you have just proven the shallow depth of your personal honesty." – Paid-up subscriber Val Crick

Porter comment: There was nothing dishonest about what I did. In fact, there were two other businesses in town – A+ Notes and College Notes – that would do exactly the same thing for students. Their offices were across the street from campus. They put up billboards and bought advertising in the newspapers. There's nothing illegal or immoral about doing research, for a fee, for a student. What those students did with my work... that was between them and God.

The only fraud in the system was the university itself. It pretended to teach students, using huge auditoriums, multiple-choice tests that were exactly the same semester after semester, and graduate students that did all of the grading and most of the "teaching." Parents weren't buying an education when they sent their kids to the University of Florida – they were buying a brand.

"Hi – I'm a subscriber to your newsletter, but realized I don't know which publication PSIA is and I'm very interested in the success stories shown from its stats. Please tell me which one it is, and how (or if) I can subscribe to it."

– Paid-up subscriber Debra Woodard

Porter comment: We've got more than a dozen products, and we toss the acronyms around quite a bit. Sorry for the confusion. Here's a key: P (Porter) S (Stansberry's) I (Investment) A (Advisory).

"Recently you have touted PNN (Toronto) and MEL.VI (Vienna). Neither of these have a U.S. listing. The only brokerage account I have is with Fidelity. I will only buy your recommendations if they are available thru Fidelity because I don't want to be overwhelmed with bookkeeping by having multiple accounts with different brokers. Is there a solution to my dilemma which will enable me to profit from your great research?" – Paid-up subscriber James DiCaprio

Porter comment: Two solutions come to mind. First, you might consider doing business with a broker that's able to provide the service you need. ETrade, for example, has greatly expanded its overseas stock universe. Additionally, we know several brokers that can easily buy foreign stocks.

Assuming you'd thought of that yourself, I bet if you asked to speak to someone up the chain at Fidelity, you'd discover that Fidelity could buy any stock, anywhere in the world.

"I can't swear to every single percentage point, but I held on for most of the gains in IDBE, CELG, ELN, and I am still holding ECA, ALEX, SA, and especially ACP. I don't see TPL on your list, but that was phenomenal, too. I have made WAY more than 10 times my Alliance membership fee, and learned a ton. My husband used to think he was pretty clever, but now he stands back in awe." – Paid-up subscriber Sally E.

"Congratulations, on your and subscriber comments on 'Bimbo' Frank. These comments should get more and more interesting as we near the '08 elections. Necessary stock research is dry. Your columns bring color and humor. Thanks for providing them." – Paid-up subscriber Bill Ryan

"I have two questions. First, how is it that you are affiliated with The Oxford Club? I recently subscribed to their newsletter service as well, and the user name and password they gave me is the same as for my S&A Alliance membership. Are you guys both subsidiaries of Agora Financial? I'm curious. Second, I recently signed up for a free trial of Hulbert's Financial Digest, a report written to compare the performance of investment newsletters. There must be over 200 newsletters in the performance review, but none from S&A. What gives? I would really like to see how S&A's newsletters stack up against the competition (from an impartial source of course). Are you scared of being compared to your peers?" – Paid-up subscriber Jacob Wylie

Porter comment: The Oxford Club, Agora Financial Publishing, and Stansberry & Associates all have a major shareholder in common – Agora Inc. Agora Inc. is a private holding company with interests in publishing companies (books, newsletters, magazines), global real estate, and health supplements. To lower our costs, we share some back office needs with the other affiliates of Agora Inc. (data warehousing, accounting, legal). However, we pay for our shared resources "a la carte," and Agora Inc. does not control our content, our marketing, or our day-to-day management. That's my job. If you'd like to learn more about Agora Inc., visit its website.

Regarding Hulbert: Beats me. We've never been contacted by anyone at that business. However, if you're interested in our track records, we publish all of the back issues of all of our products. Thus, from time to time, people will compare our record against other newsletter publishers. Dr. Van Tharp does this in his recently updated, classic investment book, Trade Your Way to Financial Freedom.

Tharp studied a dozen well-known newsletters... and found the two very best track records came from Extreme Value and True Wealth – both of which we publish.

"You are probably sick of answering queries about dividends, but there are still some odd features surrounding this process. I draw your attention the stock charts for HMA, using quote.com and stockcharts.com. In both cases, they initially showed the drop in HMA stock price from $20 to $10 after the ex-dividend date. Subsequently, in both cases they have subtracted the dividend from the old stock price, backdating it all the way to the early 1990s, so that HMA appears never to have traded as high as $20, which we know is simply not true! This seems to me to be "changing history." However, bigcharts.com still shows the March 1 drop from $20 to $10. As an aside, if, in the very unlikely event, HMA did this again, their stock price would have to be reduced to almost zero! So my question is: Why adjust the stock prices in some cases and not others? Is it the size of the dividend? Who decides?" – Paid-up subscriber Geoff Gunning

Porter Comment: Most databases reflect the total return of a stock over time by adjusting the historic prices to compensate for the dividends and spin-offs. Check out Yahoo Finance historical prices, for example. In this database, you'll see the actual price (hi, low, close) and then the "adjusted" price that is adjusted to factor in all dividends and spin-offs. The chart is drawn using the "adjusted" price.

"I am an alliance member of Stansberry and Associates for over a year now. Probably that was one of the best 'Investment Decisions' I ever made. Porter, Steve, and Dan are remarkable. I am not drunk, and I am not a distant cousin of Porter." – Anonymous

Porter comment: We've long suspected anyone who writes a positive feedback e-mail is either drunk or related to us. Despite the denials, judging by the time stamp on the e-mail, it was definitely past happy hour...

Regards,

Porter Stansberry

Baltimore, Maryland

The Safest Dividends to Grab

By Ian Davis

Special-dividend situations can be very profitable for investors – as I showed last week in my 37-year study of special dividend payments.

Stocks that paid special dividends outperformed the broader market by 8% per year, earning about 18% per year on average. These are very significant numbers. In fact, we know of no other long-term market anomalies of this scale.

And the numbers could be even larger...

Sometimes special dividends are funded through business liquidations or through "recapitalizations," which involve taking on more debt. Special dividends from these sources tend to be larger, but these situations can reduce the intrinsic value of a company.

On the other hand, companies that fund special dividends out of excess cash, which they already have on the balance sheet, typically do not lose intrinsic value. These excess-cash special dividends are usually less than 10% of market capitalization.

Let's assume that all special dividends that amount to less than 10% of market capitalization are excess-cash dividends. I ran the numbers on every special dividend issued from 1970 to today, assuming a holding period that began one day before the ex-dividend date and lasting exactly one year.

Is there a meaningful difference in the annual performance stocks that pay special dividends above or below this threshold? The answer shouldn't surprise you...

Average One-Year Return

Companies that paid a special dividend 10% or less of market cap: 24.5%

Companies that paid a special dividend in excess of 10% of market cap: 12.3%

CONCLUSION

Investors should pay close attention to companies paying out special dividends – these companies are likely to strongly outperform the market averages. Additional consideration should be given to stocks paying for the special dividend out of excess cash. Remember: Just because the dividend is small relative to market capitalization doesn't mean it should be ignored. These are frequently the most valuable to grab.

Good investing,

Ian Davis

April 2, 2007

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