Dear Mr. Berko:
We’re very close to a couple in their early 70s who live two doors from us.
They have a $16,000 certificate of deposit coming due and, as you know, interest rates are so low that it’s impossible to get a decent return.
They have asked my opinion on an annuity their bank wants them to buy.
It sounds as if they have all the facts, and the salesman seems honest.
They can take out 8 percent annually, and there’s no upfront commission on that $16,000.
But the different types of guaranteed minimum income benefits, flexible guaranteed minimum withdrawal benefits, fixed income options, different riders, enhanced death benefit, fixed account balances, withdrawal limitations, future earnings accumulation, etc., are confusing to them and to me.
They also visited a stockbroker at a small firm we’d never heard of.
That broker told them to buy Southern Co., the iShares U.S. Preferred Stock ETF and Energy Transfer Partners.
They don’t have a computer and asked me to write you for your opinion on the annuity and the three stocks.
GH for SS, Moline, Ill.
Dear GH for SS:
I doubt that the bank’s broker mentioned the 9 percent commission on that annuity that’s paid from their $16,000 investment.
I also doubt the bank’s broker told them about the 3.75 percent annual cost charged by the annuity for mortality costs, account management and other expenses.
Accuracy requires facts, but honesty requires full disclosure.
That there’s a highway to hell but only a stairway to heaven says a lot about the traffic numbers of annuity salesmen at brokerages and branch banks.
The small firm you’d never heard of (Stifel) has been around for 120 years and is listed on the New York Stock Exchange, and its recommendations are usually spot on.
Southern Co. (SO-$50.95) is a $16.8 billion-revenue electric utility.
SO’s board has increased the dividend every year since 2002, and today’s $2.24 dividend, which may be raised to $2.32 next year, yields 4.7 percent.
SO’s recent $7.9 billion acquisition of AGL Resources, a Fortune 500 natural gas utility, should enable SO to sweetly improve earnings and enhance its steady dividend growth.
Some analysts believe that beginning next year, SO should be able to grow its dividend between 4.5 and 5 percent annually.
Good choice, that!
Energy Transfer Partners (ETP-$39.78) gathers, processes, stores and transports natural gas, natural gas liquids and oil.
This stock may be too dicey, but I agree with Stifel’s ETP recommendation, as well as those on Wall Street who insist there’s impressive potential here.
ETP also wholesales and retails gasoline and owns 47,000 miles of pipeline.
This $24 billion-revenue master limited partnership, also a recent Goldman Sachs recommendation, has a $4.22 dividend that yields 10.9 percent.
Goldman owns 26 million shares.
Kayne Anderson Capital Advisors owns 31 million, and Morgan Stanley owns 15 million.
They believe that next year, ETP will generate $27 billion in revenue and increase its dividend to $4.40. And Value Line believes that in the coming three to four years, ETP could trade in the $70s.
ETP has long legs and is an egregious speculation of which I approve.
Though they’re vulnerable to rising rates, preferred stocks and their relevant exchange-traded funds have become a popular destination for income investors.
The iShares U.S. Preferred Stock ETF (PFF-$40.15) tracks the results of the Standard & Poor’s U.S. Preferred Stock Index, which measures the performance of preferred stocks listed on the New York Stock Exchange, the American Stock Exchange and the Nasdaq.
PFF invests 90 percent of its $15.7 billion of assets in various components of the index and up to 10 percent of its assets in futures, options and swap contracts.
The one-year total return is 5.59 percent.
The three-year is 5.78 percent, and the five-year is 6.05 percent. PFF has been a steady Eddie for the past five years.
It’s difficult for folks with limited funds to get good advice.
Give that broker a gold star, and buy him a 5-gallon tub of Harley-Davidson ice cream.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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