Stockbrokers and insurance

By Malcolm Berko

Dear Mr. Berko:
I’m 55 years old and recently got a $71,000 insurance settlement.
I have a good job with a fair retirement plan and also have a decent IRA that took a licking in the market crash but is coming back.
My wife and I were going to use that $71,000 to pay off our home mortgage.
However, since the interest rate is 6.0 percent and costs us less after taxes, we figured we would use this money to buy some investments .
We plan to hold them for our retirement as long as their dividends are more than the 6 percent we pay on our mortgage.
We went to two stock brokers we know, and each wanted us to buy an insurance annuity, but that didn’t sound too good.
So we went to a stockbroker we didn’t know, and he also wanted to sell us an insurance annuity.
We thought stockbrokers were supposed to sell stock and not insurance.
Can you recommend some good stocks that sell products that will be around for a long time?
We don’t want to buy and sell, and would like to hold our stocks for five, 10 or 20 years.
We just don’t know enough about the market to know when to buy or sell.
Plw so please recommend some good stocks with good products that will still be good products when we retire in the coming 12 years.
S.R., Fort Walton Beach, Fla.
   
Dear S.R.:
Brokers who sell annuities do so for various reasons.
They are not wired to code; they’re dumber than bait so they can’t pick stocks; and the commissions average between 6 and 12 percent.
I’m going to recommend seven master limited partnerships, each of which are involved in the gathering, processing, shipping and delivery of oil and natural-gas-derived products.
I kind of figure that energy will be around for a long time and eventually, it has to be transported to the consumer.
You should know that MLPs are pass-through businesses that are taxed at the shareholder level and seldom subject to federal or state taxes at the partnership level.
So, annual income, gains, losses, deductions or credits from the MLP pass through directly to the shareholder.
The shareholders report their allocated amounts from the MLP on their tax returns as if they had incurred these items personally.
And before you file your tax return, the MLP will send you a K-1 that gives your CPA the required information.
And in practically every instance, those losses and deductions reduce the taxes on MLP dividends so that your tax liability on $100 of income is often less than $15.
The following seven MLPs pay between 6.5 percent and 9.3 percent.
Each pays a quarterly dividend, has increased its dividend frequently in the past 15 years and is an issue that I feel can be held comfortably for a dozen or more years.
Open an account at Charles Schwab and give the broker instructions to reinvest all the dividends.
Then, be mindful of the “Rule of 72.” It tells you how quickly an investment doubles if you divide the dividend yield into 72.
Basically, a yield of 6 percent reinvested quarterly doubles in a little less than a dozen years. So invest equal dollar amounts of your $71,000 in the following eight MLPs:
Inergy (NRGY – $36), yielding 7.6 percent; Plains All American (PAA – $55), yielding 6.8 percent; Energy Transfer Partners (ETP – $45), yielding 8.0 percent; Kinder Morgan Energy (KMP – $63), yielding 6.7 percent; Boardwalk Pipeline (BWP – $29), yielding 6.8 percent; Teekay Offshore (TOO – $18), yielding 9.7 percent; and Oneok Partners (OKS – $59), yielding 7.3 percent.
This portfolio of seven MLPs will yield 7.51 percent and if the dividends are reinvested quarterly, assuming no increase or decrease in the dividend and no change in share value, this $71,000 portfolio would grow to $168,000 in a dozen years and will produce about $12,400 in annual dividend income.
However, if annual dividends grow by 3 percent (each of these issues have increased their dividends over the last 10 years by at least 3 percent) and annual share growth is 3 percent, then in 12 years, your investment would be worth $239,000 and your income would be about $17,900 annually.
Of course, if the shares decline in price, your quarterly dividends would purchase more shares and your dividend income would rise.
But if the shares rise in price, your dividends would purchase fewer shares and the value of your principle would increase more quickly.
Three things are important to note here:
• Not one of these MLPs has ever decreased its dividend
• Share prices almost always rise when earnings and dividends increase
• Because losses, deductions and credits are passed through to you, your tax rate on every $100 of dividend income will probably not exceed 15 percent. So this portfolio will net you 6.4 percent after taxes, and that ain’t chopped liver for a portfolio that will probably increase its dividends each year.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
© 2010 Creators Syndicate Inc.