ISSUE 73, April 2019

Our New “Dividend Aristocrat”

The Best MLP Is Not an MLP

by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Dear Member,

In life, it pays to be flexible, open and optimistic.

A family friend was once stood up on a blind date. Rather than go home and sulk, he stayed at the bar and met his future wife as they were both waiting in line for the restroom.

When I was a toddler, my parents were house shopping. The realtor had to drop something off at a house she didn’t think my folks would be interested in. I grew up in that house. My parents lived there for 34 years, and the sellers are our family’s closest friends.

As a college student, I missed an interview for a public relations position with a minor league baseball team because my car broke down (there were no cellphones back then). A friend drove me to the interview an hour late.

The hiring manager had already left. It was thundering outside, so they let me stay in the small office until my ride returned. Another manager talked with me while I waited. He hired me to be the team’s radio announcer.

So I have learned to be open to opportunities that are different from the ones I am looking for.

A few weeks ago, I started to believe it was time to get back into master limited partnerships, or MLPs. These companies, which are mostly pipeline businesses, offer great yields and tax-deferred income – so I thought I would choose an MLP for this month’s recommendation.

As I was digging into the research, there was one pipeline company that stood well above the rest.

It has a 6% yield, and it has raised its dividend for 24 years in a row. The dividend has increased at a double-digit annual rate for the past decade.

The only thing is it’s not an MLP.

In fact, the company acquired its two MLPs late last year when MLP prices got hammered. It was able to scoop them up at a bargain and keep all that cash flow for itself.

Enbridge (NYSE: ENB) owns and operates Canada’s largest pipeline. It transports oil from the oil sands in Western Canada across North America all the way down to the Gulf Coast. Eight of Canada’s 10 largest oil producers use Enbridge’s pipeline.

The company also has natural gas pipelines and is Canada’s largest natural gas distributor. It transports 25% of North America’s crude oil and 18% of its natural gas.

The stock dipped in early March after a pipeline expansion expected to come online at the end of the year was delayed until the second half of 2020. This expansion will add 400,000 barrels per day to the oil coming out of Canada.

Fantastic Financials

I’m a big fan of the company’s business model. Enbridge’s management and pipelines are considered the best in the business, but it’s the company’s financials that are especially enticing.

What’s most impressive is that Enbridge has grown its business regardless of the price of oil.

You can see in the chart below that even during the Great Recession and oil price collapse, Enbridge grew its EBITDA (earnings before interest, taxes, depreciation and amortization).

That’s because Enbridge doesn’t sell oil – it transports other companies’ oil and gas products through its pipelines, collecting a contracted fee every time, whether oil is trading at $30 or $100.

Enbridge is executing on $11 billion in secured contracts, and it has another $2 billion in future opportunities after 2020.

In 2018, distributable cash flow (DCF) grew 35% to CA$7.6 billion.

Management said that DCF per share should rise 12.5% in 2020 and 5% to 7% after 2020.

Matched by just two other companies, Enbridge has the highest credit rating in the industry.

Dividend Growth Galore

The company has set a target dividend payout of less than 65% of DCF, which gives me confidence that it can continue to fund and raise its dividend even if DCF falls at some time in the future.

In the first quarter of this year, management raised the dividend by 10%, and it expects to do the same in 2020.

If it does increase the dividend next year, it will be for the 25th year in a row. That would qualify Enbridge for the prestigious Dividend Aristocrats designation – if it were a member of the S&P 500.

Enbridge is a Canadian company, so it is not eligible for inclusion in the S&P 500. Nevertheless, the current 24-year streak – soon to be 25-year – is impressive, Aristocrat or not.

The company recently suspended its dividend reinvestment plan, which means you cannot automatically reinvest your dividends directly with the company.

But as I usually suggest, investors are better off reinvesting their dividends through their brokers anyway (see my article on Page 6 for reasons you shouldn’t).

I confirmed with many of the largest discount brokers that you can automatically reinvest your Enbridge dividends with them.

Because Enbridge is Canadian, U.S. investors will automatically have a 15% tax taken out of their dividend payments by the Canadian government.

If you hold the stock in a taxable account, you will receive a tax credit from the IRS for the amount paid to Canada.

If you hold the stock in a tax-deferred account, you will not be able to claim that credit.

If you are outside of the United States, your tax situation will depend on your taxing authority and any agreement it has with Canada.

Like when my job search got derailed and I found a better opportunity, I was looking for an MLP but instead found the best pipeline company on the market.

Announcing games on the radio for the Albany Yankees was one of the most fun jobs I’ve ever had.

If the Enbridge position works out half as well, the income and stock price appreciation will make it one of your favorite stock holdings in your portfolio.

Action to Take: Buy Enbridge (NYSE: ENB), and add it to the Instant Income and Compound Income portfolios. Place a 25% trailing stop on the stock if you’re holding it in the Instant Income Portfolio (no dividend reinvestment). I recommend holding the stock in a taxable account in order to receive the foreign tax credit from the IRS. n

How to Profit From Volatility

Tariffs, Trade Wars and the Shrinking Stock Market

The Oxford Club’s 2019 Private Wealth Seminars

The Dominick Hotel | New York City, New York | July 22-23
Carmel Valley Ranch | Carmel-by-the-Sea, California | September 9-10

After a nearly decade-long bull market, our experts are buckling down for what’s shaping up to be a new era of volatility in the stock market. They’re scouring the markets to identify the specific sectors and investments they believe will hold up during periods of uncertainty and eventually benefit from the outcomes of today’s trade wars... tariffs... Brexit... and other catalysts for crisis and opportunity.

At our 2019 Private Wealth Seminars, our team of expert investment strategists – including Marc Lichtenfeld, Steve McDonald and Karim Rahemtulla – will share their best strategies for preparing and profiting from volatility. Plus we will have a number of special guest speakers at each event.

These events are perfect for anyone looking for an intimate financial seminar. Attendance is limited to 100 Members – and we guarantee you’ll leave with a full understanding of every strategy and recommendation that is given. For all the details on these events – and to reserve your seat – click here now or email Meg Rakes at voyagerclub@oxfordclub.com. You can also call her at 410.895.7935 or 833.288.1434 (toll-free).

STEVE’S BOND INSIGHTS

Profit From This Excellent – Albeit Controversial – Blue Chip Bond

by Steve McDonald, Bond Strategist, The Oxford Club

At 9:30 a.m. on March 25, 1981, I smoked my last cigarette. It was a Marlboro Light.

There was a half of a pack left, and I kept it in my top desk drawer in my stateroom aboard the USS Adroit. My thinking at the time was that if worse came to worst, I could always light one up.

I’m thankful I never did. I remember that day as clearly as I do because the withdrawal from nicotine lasted for years. The physical withdrawal alone was a nightmare, but the psychological aspect of the addiction was the real hurdle. I didn’t know what to do with my hands or what to do after a meal, and I dreamed about smoking for 10 years after I gave it up. So when I say I think the world would be a better place without tobacco, I know of what I speak.

Since the surgeon general’s 1964 report that presented rock-solid evidence of the health hazards associated with smoking, the United States government has waged a nonstop war on tobacco.

Taxes have been heaped on them, restrictions of all sorts have been placed on them, cigarette advertising on TV has been eliminated (the Marlboro Man is no more), and the warnings on cigarette packs are enough to make anyone think twice before lighting up.

The government’s efforts have been successful – but even though the number of people smoking, both in the U.S. and abroad, has decreased since the taxes and the restrictions have been put in place, U.S. tobacco revenues have soared. More than 40 years after the war on tobacco started, cigarette companies have been able to make up for the fines and falling volumes with higher prices.

In a 15-year period between 2001 and 2016, the number of cigarettes sold in the U.S. fell by 37%. But through price increases, cigarette revenues grew by 32%.

There has also been a major consolidation in the U.S. tobacco market. The focus has moved from seven large manufacturers to just two: Altria (NYSE: MO) and Reynolds American, a wholly owned subsidiary of British American Tobacco (London: BATS).

That consolidation has allowed both companies to squeeze costs and increase pricing power. And with those moves came soaring profits. The cigarette industry sells 5.5 trillion cigarettes each year to 1 billion smokers. Over a 10-year period, the S&P 500 Tobacco Index shot up 178%.

But the threat of tighter regulations and higher taxes is still hanging over the industry, and most realists accept that eventually they could have their desired effect. Based on the results of the government’s efforts so far, I have my doubts about that.

But the industry is responding by investing in smokeless tobacco that avoids the harmful compounds associated with combustion – and, of course, what seems to be everybody’s favorite topic of late: pot.

Despite all the medical evidence and efforts by the government to curb smoking and other tobacco use, the industry has managed to thrive. When you add the potential revenues from the industry’s smokeless component and from pot, tobacco looks like a solid bet for a long time to come.

Altria

Altria was created from the old Philip Morris company and is responsible for domestic sales. It manufactures and sells cigarettes, smokeless products, wine and champagne.

Between 2016 and 2018, Altria realized increases in revenues from $74.9 billion to $79.8 billion. That’s a more than 6% increase over a three-year period.

During the same period, earnings per share increased from $4.48 to $5.08. Between 2017 and 2018 alone, Altria reported a 173% increase in earnings per share.

Looking ahead, the company expects to grow earnings between this year and next by anywhere from 6.6% to as high as 9.7%. This is a $103 billion company... and it expects it will continue to grow its earnings by 6.91% per year for the next five years. That’s significant!

It has a profit margin of 35.48% and a return on equity of 46.07%, both extraordinary numbers for a company of its size. The company reports a total debt of $25.7 billion and $8.39 billion in cash flow.

Despite the best efforts of the government to drive tobacco out of business, these are not the numbers of a company on its knees. But the big news about Altria is its recent acquisition of a 45% stake in the Canadian marijuana producer Cronos Group (Nasdaq: CRON).

When you consider the worldwide market for marijuana is estimated to be in the range of $150 billion to $500 billion, this partnership with Cronos promises to be a huge moneymaker.

Whether or not you and I believe the pot market is ever going to get that big (some have their doubts) is irrelevant. Companies like Altria, Constellation Brands (NYSE: STZ) and other big-name, established moneymakers do believe it and are talking with their wallets.

There is actually discussion that the cannabis market could prove an additional disruption to the cigarette market if cannabis starts being used for smoking cessation. That market alone could reach $22 billion by 2024. Even if the government’s anti-tobacco efforts have their desired effect, Altria’s diversification into areas outside of tobacco appear to be more than capable of maintaining the company’s record of increasing profits and payouts.

Its product may not be my favorite or yours – but it is a rock-solid company with excellent management, and it will make a great addition to our Blue Chip Bond Portfolio. Of course, the question will arise: Why should we buy the bond when Altria’s common stock pays a higher dividend? There are two reasons the bond makes more sense.

First, Altria has paid and increased its dividend for years – it is unlikely it will be reduced or eliminated. But the coupon on the bond cannot be touched, and I always go with a guaranteed payout over a possible dividend yield.

Second, the majority of investors are overexposed to stocks. As we get older, it’s critical we start shifting some of our money from stocks to bonds. Buying Altria’s bond is a great way to combat the imbalance in the average gray hair’s portfolio.

For me, a 66-year-old with 37 years in the markets, bonds make the most sense.

Action to Take: Buy the Altria 2.625% bond (CUSIP 02209sau7) that matures on September 16, 2026, at 94 or less.

The bond is rated A3 by Moody’s and BBB by the S&P. At its current price of 92.4, the bond has a yield to maturity of 3.89%. n

discount investing

How to Buy Your Stocks at a Discount

by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

When I placed my first stock trade nearly 30 years ago, the commission was $49, which was a lot of money back then.

And you had to call to talk to a broker and hope you weren’t on hold for too long while the stock you wanted to buy was ripping higher.

Today, deep discount brokers charge as little as $5 to place a trade in seconds, and there are even some that offer free trades.

I’m a fan of online brokers.

One of the biggest reasons is how easy and cheap it is to reinvest dividends.

All you have to do is tell your broker that you want to reinvest your dividends in all of your stocks or just in specific ones, and it will happen automatically and, most importantly, for free.

You can buy a stock once, pay a $5 commission, reinvest your dividends for decades and never pay another cent on that position.

However, if you reinvest dividends directly with the company whose stock you own, there are often high fees and commissions.

For example, if you enroll in Darden’s (NYSE: DRI) dividend reinvestment plan (DRIP) directly through the company instead of through your broker, it will cost you 5%, to a maximum of $5, every time your dividend is reinvested.

If you want to sell your shares through the company instead of through a broker, it will cost $15 to $30, depending on the type of order, plus a fee of $0.10 per share.

There are additional fees for other services as well.

It will cost you $10 to enroll in AbbVie’s (NYSE: ABBV) DRIP, but you won’t be charged fees each time you reinvest. If you sell the stock, you will pay between $15 and $30 plus a fee of $0.15 per share.

Another reason I prefer to hold stocks and reinvest with the broker rather than directly with each individual company is simplicity.

If you own five stocks and are participating in DRIPs with each company, that makes five separate accounts you have to keep track of, which means five separate 1099-DIV forms...

If you reinvest your dividends through your broker, all of your information is available on one statement and you receive one 1099-DIV at the end of the year, making your life easier (and making it much simpler to organize your taxes).

I almost always recommend reinvesting dividends through your broker – with one notable exception.

There are a select few stocks that offer discounts when you reinvest directly through their companies.

The discounts typically range from 2% to 5%.

Water utility Aqua America (NYSE: WTR) offers a 5% discount if you reinvest directly through the company (though you’ll still pay $15 plus an additional $0.15 per share when you sell).

That means you get an additional 5% return on every dollar you reinvest.

Just one stock in The Oxford Income Letter’s portfolios offers a discount.

Investors in Omega Healthcare Investors (NYSE: OHI) can get a 1% discount.

Here is a list of some dividend payers that offer discounts on their DRIPs.

(This isn’t a comprehensive list of all discounted DRIPs, but there aren’t many more.)

It’s important to understand that some of these companies may still charge fees to buy or sell their stocks directly.

Additionally, some discounts will vary from time to time. That range is typically 0% to 5%. There are several companies with this type of policy that are currently not offering discounts for dividend reinvestment.

Compound Income Portfolio member Oneok (NYSE: OKE) is one. It can provide as much as a 5% discount, but currently there is no discount available.

Companies offer these discounts to encourage long-term investing and create a stable base of mom-and-pop shareholders. That way management doesn’t feel like it must respond to the whims of institutional investors and focus on quarterly earnings rather than the big picture.

Reinvesting dividends at a discount can be an excellent way to generate excess returns from an already successful strategy. Just be sure you understand all of the fees and costs that may come with it. n

We believe it’s helpful to share questions and clarifications on dividend-investment strategies with all of our subscribers. Keep in mind, Marc can answer your general strategy and service questions, but he cannot give personalized advice. As always, feel free to send us your questions at mailbag@oxfordclub.com.

Marc L.,

You are one of few who help retired people trying to make their investments produce income that will last for the remainder of their lives.

THANKS A BUNCH!

As an 80-year-old Chairman’s Circle Member, I have transitioned 90% of my holdings to recommendations from The Oxford Income Letter and Oxford Bond Advantage and to real estate investment trusts (REITs) and closed-end funds (CEFs) that I research and buy at a discount to their net asset values.

I’m drawn to REITs and CEFs that pay a nice dividend and seem solid. I have 60% of my portfolio dedicated to fixed income and 35% to dividend equities. I also have five years of laddered CDs, so I can sleep knowing I can ride out any stock market drops. I exercise, socialize, read, study and plan on making it to 100.

Lately, I have been looking to see what I can do to produce capital gains that I never have to pay tax on. I hope to leave them in my estate for my children and grandchildren, who will get a stepped-up basis to the market value on the date I “buy the farm.” It seems like assets that produce return of capital would be good candidates for this, but dividend growers that pull their stock prices up with their increasing payouts might be better.

What are your opinions about these two alternatives? – Greg P.

Thanks for the great email, Greg. It sounds like you’re doing all of the right things.If you want to leave your family stock that appreciates in value and doesn’t require them to pay capital gains, then I have good news. For both partnerships that generate return of capital and regular stocks, the cost basis for any heirs is the price on the day of the death of the person who bequeathed the assets.

As far as determining which is a better investment, that question can be answered only on a stock-by-stock basis. I don’t believe one type is better than another. The one caveat I will mention is that investors shouldn’t get too overweight in partnerships because many of them are in the energy sector – so if you like partnerships and their return of capital, just be careful to make sure you’re not loaded with stocks from one sector.

Marc, I consider your Oxford Income Letter recommendations to be a true blessing in my life. My wife and I have been retired for several years now, and we have enjoyed complete peace of mind with our investments in your portfolios.

In your January 22 Mailbag, you answered a couple of questions regarding using or ignoring trailing stops in the Compound Income Portfolio. I do not reinvest my dividends; I draw a portion of them out for monthly income, never touching the principal. Does it make sense then to not be too concerned with “stops” and the ups and downs of the market?

Thanks so much! – Michael L.

For investors who are collecting their dividend income and not reinvesting, I generally recommend using trailing stops. The reason is that many investors in that situation also draw down some of their capital, and a large loss could be impactful to those people.

For investors who are reinvesting their dividends, I usually don’t recommend placing stops on the stocks because I want them to reinvest the dividends at lower prices if the stock falls but the companies’ fundamentals stay intact. That’s when you can pick up more shares, which will generate more dividends and boost the compounding machine into overdrive.

For an investor in your situation who is collecting the income but isn’t touching the principal, I’m comfortable with not using a trailing stop, but only if a large loss wouldn’t affect the investor’s lifestyle or ability to pay bills. Otherwise, I’d rather be conservative and use the trailing stop.

Hi, do you have any additional Social Security information or formulas that we can use to determine the best strategy for when to start taking payments? I just turned 62 in November, and my wife, Sandra, will be 62 in September 2019. Our current estimates for how much each of us will receive at 62, 66 and 70 are as follows:

Keith – $2,161, $2,915, $3,770

Sandra – $1,025, $1,406, $1,799.

I understand the math and recognize the ramifications of taking payments early. My question is mainly focused on what strategy would be best for Sandra to claim spousal benefits – is she better off taking her benefit or a spousal benefit? Would it be more beneficial to take her benefit at 62 and then convert to a spousal benefit later?

Thank you. – Keith

Thanks, Keith. Nothing like the federal government to take a good idea (let’s make sure seniors don’t starve) and turn it into a labyrinth of rules and red tape that is difficult to decipher.

Once someone claims benefits, their spouse can claim spousal benefits, which equal 50% of the first person’s payment. If Keith is claiming benefits and Sandra follows, she will not have a choice as to whether to claim her own benefits or spousal benefits. She will automatically receive whichever one is higher. This is called a “deemed filing.”

If Keith waits to claim benefits, Sandra could claim her own benefits at any time. Once Keith starts collecting, Sandra will automatically receive the higher of her two options, which in this case is her spousal benefits.

However, it’s important to note that if Keith waits until age 70 to claim benefits, Sandra’s spousal benefit will max out at 50% of his full retirement age benefits, not his benefits at age 70 – so the most she can claim as a spousal benefit is $1,457 (50% of $2,915).

If both expect to live well into their 80s, then waiting until age 70 for both probably makes the most sense. If not, then the numbers get more complicated.

By waiting until age 70 to claim instead of collecting benefits at 66, Keith will take home an extra $855 per month, or $10,260 per year – but Sandra won’t be able to claim spousal benefits for those four years, leaving more than $69,000 on the table during that time.

It will take until Keith is close to 72 years old to make up for the $69,000 that Sandra will not have been able to claim while Keith was between 66 and 70.

There is no simple formula because this depends on what each investor needs, when they need it and how long they expect to live. n

A Slick Way to Ride the Booms and Avoid the Busts of This Volatile Commodity

by Kristin Orman, Research Analyst

Over the past 12 months, the price of West Texas Intermediate (WTI) oil boomed 20.5%, reaching a high of $76.41 on October 3, 2018. Then it busted, falling a dizzying 44.3% and reaching a low of $42.53 on Christmas Eve.

Since touching its low on December 24, 2018, WTI has rebounded 39.3% and now sits at around $60.When all was said and done, the price of WTI finished at a loss of 5.32%.

Oil and gas companies have been volatile investments since 2014 – but there’s a group of related stocks that has been outperforming the oil market over the last year, and it’s primed to deliver income and price appreciation in the years to come.

The Pick of the Pick-and-Shovel Plays

You’ve probably heard of pick-and-shovel investments – those companies that provide the underlying technology, not the final product or service. And they’re a great way to gain exposure to a volatile market like oil. These companies often prosper no matter which oil companies succeed or fail.

Looking for oil is risky. Exploration and production (E&P) companies spend millions of dollars every year drilling for oil, and there’s no guarantee they’ll find it.

And there’s no guarantee they’ll make money off of it when they do find it. As you’ve seen over the past 12 months, the price of oil is volatile. Depending on an E&P’s costs, the amount of money it makes varies greatly too.

That’s where pick-and-shovel plays come in handy. These companies provide vital goods and services to the oil market. They sell things that drillers need to buy to run their business regardless of whether the price of oil is moving up or down.

Pipelines are a great example of a pick-and-shovel investment. They’re transportation networks that move oil and gas from the fields to end users.

The performance of the Bloomberg Americas Pipeline Index versus the price of WTI over the past 12 months shows the benefit of investing in an oil and gas pick-and-shovel play.

The Bloomberg Americas Pipeline Index is a market cap-weighted index of the top North, Central and South American pipeline companies.

Over the last year, the price of WTI fell 5.32%, while the Bloomberg Americas Pipeline Index returned 18.23%. The pipelines outperformed the price of oil by a whopping 23.6%.

A Big Payout Pipeline

Pipeline companies make money transporting oil and gas for a fee. They typically have long-term contracts with guaranteed minimums. Their businesses have much less exposure to oil prices.

That means their cash flows are much steadier than E&P companies’ are – but price appreciation isn’t the only return pipelines offer.

A number of oil and gas pipeline operators pay hefty dividends to their investors. Many, though not all, of these companies are structured as master limited partnerships and are required to distribute the majority of their earnings to shareholders.

Pipelines often have high dividend yields and offer some of the best payouts of the oil and gas sector for income investors. n

The Oxford Income Letter portfolios fit into the Blue Chip Outperformers level of the Oxford Wealth Pyramid. For more information, go here: www.oxfordclub.com/wealth-pyramid.