Low interest rates strangling retired folks
May 8, 2012 8:50PM
Updated: June 10, 2012 8:03AM
D ear Mr. Berko: I am 78, my wife is 81, and like many investors today, we want income. So what do you think of investing in Alerian MLP, which is an Exchange Trading Fund paying 6 percent? I’m angry, disgusted and disappointed that the government keeps interest rates so low. I’ve worked all my life and so has my wife. We raised four children, paid for their education and managed to keep a little over $500,000 in our 45 years of working. We got hurt twice by brokers in 1987 and 1998 and are afraid of being taken advantage of once again. So we planned a worry free, non-stock market retirement, certain we could always get a minimum of 4 percent or $20,000 from this money in CDs. Now it looks like we have to go back into the market because we are coming up short every quarter and we do not want to reduce our standard of living. Each of us have good pensions and good social security checks, and we have a part-time business from home that earns us between $10,000 and $14,000 annually. So we’re not hurting, but we miss that extra $15,000 to $20,000 we thought we could depend on from our CDs and the many little things it afforded us. I didn’t write to complain but to tell you our circumstances and ask for your advice on Alerian. It’s recommended by a broker who is a customer of our home business, and he said not to buy it from him (his firm charges too much) but to buy it from a discount broker. At least he is honest about this. Please tell us if it is OK to buy? Is it safe? Can we invest $100,000 in it?
Dear WS: Low interest rates are strangling the resources of most retired folks, frightening them into desperate decisions. And in the process, colonies of snake oil salesmen ooze from the woodwork like Formosan termites sucking the marrow from their tired bones. It’s a war zone out there, and many trusting retirees have been savaged by hucksters, banksters and brokesters. However, Alerian MLP (AMLP — $16.30), an Exchange Traded Fund (ETF), while not the safest stock on the planet, is certainly a lot less volatile than many, and the 6 percent dividend appears dependable. And yes, you can purchase $100,000, but I think that’s overload and overboard. The share price has been moderately stable since its IPO at $15 in September of 2010, while the dividend has been flat as a pancake. Because you can afford the risk, I have no objection to a 1,000 share purchase as a long-term investment. And as most readers know, I have been a big fan of dividend-paying stocks for over 30 years, especially dividend stocks that grow their distributions frequently.
I believe that growing dividends are infinitely more important to most investors than growing principal.
And inarguably, dividend growth is much more dependable than principal growth. So one can, with a much greater degree of certainty, predict the potential dividend payout of a stock five years hence than its potential share growth.
However, I’m not an AMLP aficionado. It does provide lower risk via diversification, but an informed investor could do significantly better owning some of the issues in the AMLP portfolio, earning much higher yields and excellent tax benefits. Exterran Partners (EXLP —$21) at 9 percent, Boardwalk (BWP — $26) at 8 percent, Energy Transfer (ETP — $45) at 8 percent and Regency Partners (RGP — $24) at 8 percent may be some good choices, all of which have grown their dividends frequently since inception. These companies and other MLPs I’ve recommended in the past own enormous assets that are subject to huge depreciation charges. This depreciation reduces the MLP’s earnings but have zero effect on the MLP’s cash flow. This depreciation is also passed on the shareholder, creating a significant tax advantage and in most instances, 80 percent to 90 percent of an MLP’s dividends are not taxable. It does, though, reduce your cost basis on the stock. However, AMLP shareholders are unable to ben efit from this advantage. So you may also consider owning a few individual MLP equities for their tax advantage as well as the higher yield and growing income.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.