Retirees and those who are near retirement are desperate for income — bond yields are ridiculously low, not just for municipal bonds and Treasuries but for riskier corporate bonds, CD rates are too low to take seriously, even dividends are getting lower as more and more investors overpay for income… so the marketplace is ripe for newsletters who try to sell you on high income and safety.
The latest such ad is touting something Roger Michalski at Eagle Financial is calling a “Super 7 Annuity” — he’s selling the Forecasts and Strategies newsletter that’s helmed by Mark Skousen, and your details about that “Super 7 Annuity” are waiting for you, all you have to do is subscribe to his newsletter.
Or, of course, you could read on and see what your friendly neighborhood Gumshoe can wring out of the Thinkolator for you — since you’re here anyway, let’s try that first.
The email that I got caught my eye with this:
“Did you know the average annuity has a measly payout of 3% interest?
“And if your payout is that small to begin with, imagine how much of that can be eaten up by taxes, fees, and inflation?
“Suddenly, that ‘guaranteed’ income stream doesn’t look so great.
“But what if you could earn 3 TIMES more than the average annuity payout… and do it without jumping through all the hoops the insurance industry demands?
“You can, with a little-known play — discovered by Dr. Mark Skousen.
“I call it the Super 7 Annuity.
“It pays an annual income of 8% to 10% … but without all the fees, commissions, or hidden costs you often see in regular annuities.
“Plus, you’ll never pay any penalties for cashing in early. You can take your money out whenever you like, and as much as you’d like. It even offers favorable tax treatment.
“One last thing: the Super 7 Annuity does not expire on your death. You can pass it on to anyone you wish — without losing one cent of its value.
“That makes the Super 7 Annuity the closest thing you’ll ever find to an eternal income stream for you and your heirs.”
That sums it up pretty well (you can always check out the actual ad here if you want more details), and it tells us that he’s not really recommending an insurance contract like an annuity… he’s recommending some sort of dividend-paying stocks or funds.
Which means it’s not really a fair comparison, of course — it may be that you can get a pretty low-volatility, decent average return from a well-diversified portfolio of income investments… but they’re not going to have a guarantee like you would expect to get with an annuity. No guarantee that the principal can’t crash in value, no guarantee to pay out any yield for any set length of time, no guarantee that the company offering the yield won’t go bankrupt and leave you stuck. They may be super-solid, they may have an extremely high chance of outperforming the average annuity (I’m not so crazy about annuities either, partly because it’s so hard to compare one to another and because they are often used to hide outrageous fees), but one reason you get lower returns from annuities is that part of that money goes to insurance. There’s a big difference between figuring that you have, say, a 90% likelihood of things working out as your models predict and saying that you are guaranteed not to lose money, or guaranteed some minimum return.
So with that caveat, let’s see what Skousen is pitching as that “Super 7 Annuity”… here’s some of the detail from the ad:
“On October 16th, 2007, a unique ‘annuity’ was quietly created by a private company.
“Today, we call it the Super 7 Annuity for seven reasons I’ll get into in a moment.
“What’s most important right now is that you understand the Super 7 Annuity pays out an 8–10% yield like clockwork….
“… today, with record stock-market volatility upsetting investors, the lure of a guaranteed income for any investor is hard to resist…
“Making the Super 7 Annuity – with its consistent 8–10% yield – one of the most attractive income plays out there today.
“Why wouldn’t it be when it…
“Triples the Return of an Average Annuity!”
Volatility is actually pretty low these days, though it has spiked up from time to time in recent months… and I think most folks perceive a lot more risk in the market than the volatility numbers would indicate.
The ad even goes into the “warning bells” neighborhood, showing the pictures of all the great things you could do with your wealth once you start receiving those “Super 7 Annuity” payouts — which, of course, is intended to get your brain to skip a step… don’t think too carefully about this offer, just start imagining what you’ll do with all that money. If you do that, your imagination does the sales job for us and we don’t even really have to convince you!
As always, if there’s a photo of a luxury car or a yacht in the newsletter pitch you’re reading that’s a good sign that you should walk away. Thankfully they did NOT take that next step and show you the sunbathing supermodels on a yacht who would be part of your life if you just joined the exclusive club hosted by this $49 newsletter… so there is still some propriety, and a touch of hope for mankind.
So what else do we hear about this “Super 7 Annuity?” From the ad:
“… the Super 7 Annuity pays out monthly and boasts a history of giving its holders two bonus payouts a year. That’s a total of 14 income deposits made directly to you…
“And in really good years, Super 7 has been known to pay out three additional times – a total of 15 income deposits a year!
“Name another annuity that offers anything close to that, or offers you 8–10% annually – three times the return of an average annuity.”
And we get a list of the “power players” who have stakes in “the issuing company behind the Super 7 Annuity” as follows:
Royal Bank of Canada
Price (T.Rowe) Associates Inc.
Burgundy Asset Management Ltd.
UBS Group AG
Pinnacle Summer Investments, Inc.
Sanders Morris Harris Inc.
Macquarie Group Limited
Muzinich & Co., Inc
“And you can add MetLife to that list – even though this insurance company sells around $5.7 billion in annuities each quarter. It speaks volumes when the experts at MetLife would rather invest their own money in the Super 7 Annuity….
“No less than 18 funds recently bought a stake in the Super 7 Annuity… while 48 increased their positions.”
And we’re told that the management team for “Super 7” owns “over 2.8 million” shares and is buying more.
So what is it? Well, with those clues we got a good answer from the Thinkolator that I was pretty sure was right… but we can confirm that it’s certainly correct because they also included a chart of this “Super 7” total return since inception in the fall of 2007. Thinkolator sez this is: Main Street Capital (MAIN)
MAIN is a Business Development Company (BDC), which basically means it’s a lender to small and midsize businesses — and it has chosen to be taxed as a BDC, which essentially means that it’s a “pass through” company when it comes to taxes: they don’t pay taxes, they pass that tax obligation through to shareholders like you, who pay taxes on the income received from the BDC (unless you hold shares in a Roth IRA, in which case nobody ever pays taxes on it).
And yes, this has been a very successful BDC, dramatically outpacing the returns of the average BDC since inception (that outperformance has continued this year, MAIN has a total return of 21% over the past twelve months vs. 11% for the BIZD ETF and 9% for the BDCS ETN, both of which try to track the BDC market).
And yes, it does pay dividends monthly — and they do typically pay two bonus dividends a year (in December and June)… and though they haven’t reported yet (they report on Monday) they have already increased the monthly dividend for the coming year, from 18 cents to 18.5. So if that dividend rate continues, and they also pay out similar “bonus” dividends over the next year, the payout for the coming 12 months would be $2.71. At current prices (which have been rising pretty nicely, along with most other dividend-paying investments), that would be a yield of 8% (the calculations you’ll see in Yahoo Finance and other places don’t typically include the special dividends or “extra” payouts in their calculations, so you’ll probably see it listed elsewhere with a yield of 6.5%).
So yes, the dividend yield for MAIN is much higher than you’d be able to get with any income annuity, certainly (those are largely based on bond yields, and the total return has certainly been far better than would have likely been available with any market indexed annuity over the past decade. But that is, of course, because this is an individual company that operates as a BDC, it’s not a guaranteed insurance contract.
By way of comparison, if you bought a Vanguard immediate annuity right now and you’re a 65 year old man, you’d get an annual payout of about 7% (though that’s an income annuity, so you give up any right to the principal… it’s just a way to guarantee a set level of income as long as you live, so in that case the insurer wins if you live until you’re 78, and you win if you live past 79 — assuming that neither you nor the insurer has any way of making any return on the up-front money you pay them at 65 and you’re just eating through the capital each year).
Or if you wanted to buy an accumulating annuity right now, you can get a guaranteed annual rate that’s probably close to 4% (I think my current annuity contract, from back in my days as an academic when I had a TIAA-CREF account, is accumulating at 3.75%). That doesn’t pay you income, it’s just the guaranteed annual rate of return.
If you get into indexed annuities, which tie your returns to some index (usually the S&P 500) and restrict the gains you can make (with a ceiling on annual returns) but also guarantee that you won’t lose principal (the terms vary widely), you might be able to average something better than 50% of the stock market returns if you’re fortunate and get a good annuity (there are plenty of bad ones, but one problem with annuities is that they’re often sold by commissioned salespeople in your insurance agent’s office, and a lot of people don’t know how to compare one product to another, or which fees or riders to be mindful of).
None of those, however, have anything to do with Main Street Capital. MAIN is a financier — they raise money in the stock market and also borrow money using the low-cost loans made available by the Small Business Administration, and they use that money to lend to small businesses who want to expand or grow. They’ve been able to make equity investments in many of their portfolio companies as well, and the capital gains they generate from their portfolio help to provide funding for those supplemental dividends each year. They have a pretty nicely diversified portfolio of companies, which is a positive sign, but that doesn’t guarantee that those companies will always be able to pay their loans — thus the risk, and what differentiates investment in any particular dividend-paying stock from investment in an annuity contract.
I wouldn’t say that MAIN is unusually risky, you can make that call on your own — buying a few days before earnings heightens the chance that the stock will be unusually volatile for a bit, but they have already announced their dividend increase so there’s perhaps reduced risk that they would say anything really bad. You can see the investor presentation from last quarter here if you’d like to have a quick rundown of their business and their strategy.
It is good to see decent insider ownership at MAIN, and they have for a long time been consistent buyers — though it’s not that they’re betting that the price is particularly attractive today, it’s really that a handful of their executives and board members buy a few shares every month. Perhaps if they can’t pick the perfect price at which to buy, we shouldn’t try either, eh?
It’s also a BDC that looks like it has a pretty reasonable structure, since they’re internally managed (some BDCs are really more like investment funds and pay high management fees or incentive fees to the company that actually does the work, MAIN is managed by it’s own employees and they say their effective annual expense ratio is about 1.4%).
I don’t own any BDCs right now, but there’s an argument to be made that the more conservative among them might be a pretty decent bet compared to banks right now (an analyst from Baird was saying as much a few weeks ago) — in the case of MAIN, it looks like they’re mostly using long-term debt (Small Business Administration loans) to back their investments, which provides some stability and lessens the worry of what would happen in a repeat of the 2008 financial crisis (when most BDCs and other leveraged companies that are essentially financiers, like mortgage REITs, got clobbered, sometimes just because they couldn’t roll over their short-term debt at reasonable prices). I’m not sure what MAIN’s performance would be like in a rising rate environment (they haven’t lived through one yet), so it’s probably likely that they would face similar pressure to other income investments (bonds, REITs, etc.) if interest rates rise, at least in the initial reaction, but the current yield is high enough to provide some possible cushion against a move like that. They did far better during the financial crisis than did most of the larger and longer-lived BDCs at the time like American Capital (ACAS), Apollo (AINV) or Prospect Capital (PSEC), so that’s encouraging, and I’m encouraged that MAIN has also been increasing its tangible book value per share over the years while many BDCs tend to see their per-share book value erode over time as they pay out dividends.
And I guess we should at least credit Mark Skousen with being consistent, because he also pretty aggressively teased this stock back in 2012, and again in 2013 and 2014. He also called Enterprise Products Partners (EPD) the “best company money can buy right now” when it was awfully close to its all-time peak in the Fall of 2014, so he’s not infallible (that’s off 20% if you include dividends, pretty much matching the performance of MLPs in general), but he’s been right about MAIN so far.
So that’s not a ringing endorsement, I suppose, but you can’t get that from a 20-minute browse through the numbers. MAIN looks pretty good from what I’ve read so far, as long as you don’t think of it as a guaranteed return comparable to an annuity — it’s certainly more attractive than most BDCs I’ve taken quick looks at in the past year or two, but I’ve never looked at most of them and there are quite a few smaller players in the mix who might be worth your attention (that same Baird analyst I referred to above called out FDUS, MRCC and TCAP in addition to MAIN, and those have all had pretty good recent performance as well). If you’ve got other comments or know of reasons to be wary of MAIN or skeletons to look for in their closets (or if you have another favorite BDC), please fell free to shout it out with a comment below. Thanks!