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The 4 Keys To Building Wealth - Midstream MLPs As An Example

The four keys to building wealth are falling prices, owning cash generating assets, reinvesting the dividends, and having decades on your hands to keep doing so. This is the case for all manner of assets, and there is no particular magic with midstream Master Limited Partnerships ((NYSEARCA:MLPS)). I simply chose to write about MLPs because prices for these assets have come down and may have further to fall, which makes for a perfect case study.

For background, midstream MLPs are mostly pipelines that move oil or natural gas from one point in the production stream to the other. Companies build the pipeline infrastructure, lease it out to oil companies, collect lease payments, and distribute those payments to shareholders.

The leases to the oil companies sometimes have escalation clauses -- these provide that with time, the oil companys rent goes up by a small amount per year. MLP companies mostly try to grow their distributions to shareholders by finding new projects, building more pipelines, and thereby generating more revenues from which to make larger distributions. And the way they fund those new projects is to issue more stock, or to borrow.

These are not favorable market conditions for an MLP company to issue new stock or take on more debt. As a result, the prospects for future dividend growth are bleak. In fact, one of the top pipeline companies in the USA, Kinder Morgan (NYSE:KMI) recently pared back its estimates for future distribution growth, citing difficulties in funding new projects. Take them as an industry bellwether for arguments sake.

For many investors, MLPs are yield-oriented assets, and as such, MLPs compete with other yield oriented assets, like bonds. If interest rates on bonds are rising, that makes MLP investments less appealing... UNLESS the MLP distributions can grow at least as quickly as the rate at which interest rates are rising. But many investors think interest rates for bonds could rise over some period in the future. To make matters dramatically worse, many also believe that distributions from MLP investments might not only fail to grow as quickly as interest rates are rising, but MAY NOT GROW AT ALL! Or even worse, MLP distributions may even FALL from where they now are!

The impact of those two forces colliding against the stock price of an MLP is comparable to that a wild-eyed adult male chimpanzee with a wrecking hammer throwing a complete fit in a china shop. Prices for MLPs have crashed already, but this angry chimp could have staying power. Years of staying power. Some investors dont prefer the risk of armed, angry chimps smashing their portfolios like delicate china, and opted to sell their MLP shares in favor of less, shall we say, exciting, alternatives.

I have no idea whether interest rates will do one thing or another, or whether MLPs will raise or cut distributions now, or in the future. I dont think anyone does. And whats more, I dont need to and neither do you. Here is why.

Assume that you start out with $1000 today, and you buy shares of an MLP trading at $10 a share. Assume that every year for the next 40 years, that stock is going to crumble and to keep crumbling. Its going to drop 8% a year every single year for 40 years. And thats not all! The dividends will drop too. The dividend yield is currently 10% (close to the yield for the ETF AMLP), lets say, but dividends are going to fall by 4% a year, every year, for 40 years. In other words, the angry chimp is here, and he is here to stay. Your first impulse may be that is not the investment situation for me. But remember that what you see are actually the first two conditions for building wealth: you have a cash-generating asset (although the distributions will be steadily decreasing), and you have persistently falling stock prices.

All you need now are the two remaining ingredients -- time and a persistent reinvestment strategy that will continue long into the future. So, what you are going to do is to collect your ever-shrinking dividend, and reinvest the money into the ever-falling stock price. Heres the executive summary of the outcome of this investment program. In year one, you have a portfolio worth $1,000 and portfolio income of $100, and in year 40, you have a portfolio worth $903,323 and income of $310,480. It is not the outcome youd expect from an asset with a price that drops 8% a year every year for 40 years, with steadily declining dividends. Its far more natural to simply see the chimpanzee with the hammer and want to scream run!!!!!! Many investors have.

(click to enlarge)

But this spreadsheet explains why instead of running, you might consider taking a pause, and to even start buying all the bits and pieces of broken china dishes in the wake of the angry market chimp with the sledge hammer.

The most important factor in this exercise, though, is that the stock price declines at a greater rate than the dividends decline. That is a huge assumption, but one I making now because I am extrapolating on what has happened over the past year. People say it was a bad year for MLP investors. The Alerian MLP Index ETF (ticker AMLP) is down by 27% -- but the dividends went from 29 cents a share to 30 cents a share. In sum, the stock price fell far, far more than the distributions (which grew modestly). Far from being a terrible year for MLP investors, if you look at the investment world through the lense of this spreadsheet, youd be celebrating. The angry chimp with a sledge hammer is your friend.

Just a quick aside. Getting cozy with angry, china-smashing primates seems like a lot of work, and some of you may be asking, why bother? Why not invest in a stock index like the Samp;P500? Samp;P500 companies pay close to a 2% dividend currently, and have tended to raise dividends by 7% a year over the long term, and stock price growth over many many years might be close to 7% (who knows, but its not an unreasonable wild guess to make). Why not avoid the angry chimp altogether? The following spreadsheet explains why in no uncertain terms.

(click to enlarge)

In short, you do far, far better as an investor when you hear the sounds of destruction and mayhem, and come running towards it with your tongue lolling, like you just heard the dinner bell. If you can make up a good argument for why stock prices will fall further and for longer, that is PRECISELY the reason why you should be far more compelled to buy more, and to keep doing so for as long as you can. Just dont expect many other investors to do so -- this sort of investment behavior very much goes against human nature.



YOUR PLACE TO CALL HOME: Homeownership is in demand in St. Charles County

"The report of my death was an exaggeration," is a famous quote from Mark Twain in responding to a report of his passing. Well, more than 100 years later, the so-called "experts" in the media got it wrong again! You remember the headlines: "Is the American Dream too expensive?" and "Nobody wants to be a homeowner!" Those are just some of the gloom and doom headlines we heard a few years back. Well, just like Mark Twain, the reports of the death of the American Dream were wrong!

Now don't get me wrong, the economic difficulties that began in 2007 took a toll on the housing market. For the first time in generations, we saw a decline in values. This decline in value, along with increased unemployment, left far too many American families facing the nightmare of foreclosure or short sale of their home. If you have followed these columns over the last few years, you know my predecessors often wrote about how the real estate market would rebound and how real estate remained the best long-term investment available to the American family.

As it turns out, they were right and the real estate market here in St. Charles County is back. As I have talked about in previous columns this year, sales and home values are on the rise in St. Charles County. The numbers are in for the first nine months of this year and they show a great recovery in our county. The median sales price of a home in St. Charles County was $189,000 through September of this year. Not only is that an increase over last year and back to pre-recession levels, it is the highest median home value we have ever seen in St. Charles County!

In more good news, the number of homes sold and the dollar volume of those sales continue to set records in St. Charles County. Since April, the number of homes sold and the dollar volume of those sales are at levels we have not seen since before the economic difficulties began in 2007. Plus, the future looks bright! Pending sales -- homes under contract, but not yet sold -- continue to outperform last year. If you are a homeowner, the good news continues. In the first nine months of this year, it took, on average, only 24 days to sell a home in St. Charles County. That is down more than 50 percent from last year!

The great news is the American Dream is back in St. Charles County! If you are thinking about buying your first home or maybe moving on to a larger or different home, the time to act is now. While home values are rising, they remain very affordable in St. Charles County. Plus, whether you are looking for your first home, a move-up home, your dream home or maybe your empty-nest home, you can find it in St. Charles County. In addition to existing homes, area homebuilders are back and building new homes in all price ranges.

In addition to the affordable variety of homes in our county, mortgage interest rates remain at near historically low levels. Last month, the Federal Reserve decided not to raise interest rates, at least at the current time. There are programs available that can get you into a new home for as little as three to five percent down, with a very low interest rate.

It is important to remember things will change. Chances are home prices will continue to increase. In addition, as our economy continues to improve, interest rates will start to increase, so the time to act is now.

Homeownership is the key to long-term financial stability for most families. We all need a place to live. Since this cost is unavoidable, it makes the most sense to invest in a home of your own. It is financially sound to build equity and wealth by paying off your own mortgage, rather than paying rent to a landlord and thereby paying off his mortgage and building wealth for his family. On average, the net worth of a homeowner is more than 100 times that of the average renter.

While the numbers are important, your home is about much more than money. We will soon be in the holiday season when families and friends will gather in homes all across the land. It is a joyous time of togetherness and celebration. Unfortunately, with the new government regulations, if you haven't begun your home search yet, it may be too late to celebrate the holidays in a new home. Now is the time, however, to plan for the year ahead. Call your real estate agent to begin the search so you can enjoy spring and summer and everything the year ahead will bring in your new corner of the American Dream!

Remember, not all real estate agents are Realtors. Be sure to ask your agent if she is a member of the St. Charles County Association of Realtors.

Call your St. Charles County Realtor today!



Owning still beats renting, report says — but where will you get the down ...

While homebuyers can put as little as 3.5 percent down, the standard down payment is 20 percent, which would be $44,680 for a median-valued home in South Florida, the analysis found.

Skylar Olsen, senior economist for Seattle-based Zillow, said many potential buyers have to put off owning unless they can ask family for down-payment assistance.

Home ownership is the more affordable option, but how do you get there? Olsen said.

Rents have risen steadily after the housing bust on demand from former homeowners who cant qualify for mortgages and young professionals who dont want to be tied down to a house. Consumers often cite recurring costs such as property taxes, insurance, maintenance and homeowners association dues as the reason why renting is more practical than owning.

Most analysts agree that buying is the better option than renting when it comes to wealth creation, but a study from professors at Florida Atlantic and Florida International universities shows that owning isnt as clear cut of an advantage when investment opportunities for renters are considered.

According to the Beracha, Hardin amp; Johnson Buy vs. Rent Index, South Florida renters who invest the money they would have spent on taxes, maintenance, insurance and other costs often do just as well as homebuyers in building wealth.

Ken Johnson, an FAU economist and one of the authors of the index, said consumers should look to buy eventually. But he insists they dont have to worry if they lack the money for a down payment now.

Youve got to get in the game sooner or later, but if someone doesnt have that $44,000, they should look to find a bare-bones rental and start investing in stocks and bonds and they will be able to own one day.

This email address is being protected from spambots. You need JavaScript enabled to view it., 561-243-6529 or Twitter @paulowers



Stifel Continues Building Wealth-Management Business

Stifel Financial continues its buying spree, penning a deal to acquire Eaton Partners in January 2016, Bloomberg reports.

Stifel said in a statement that the Eaton acquisition, the terms of which were not disclosed, expands the scope of its investment-banking and wealth-management arms, with CEO Ronald Kruszewski adding in a press release that the deal is about "expanding our core advisory business and leveraging direct placements with our high-net-worth platform."

"Direct" or "private" placement refers to selling securities -- representing debt, equity, limited partnerships or venture funding -- to institutions such as banks and pension funds and to very wealthy private investors. These transactions don't have to be registered with the SEC. Generally speaking, direct placements are cheaper for issuer and buyer alike because they involve less red tape.

Investment banking and wealth management are currently behind more than half of Stifel's revenue, according to data compiled by the news service. Eaton's clients include more than 4,000 institutional investors, while in the last five years its fund-raising amounted to $25 billion, said Stifel in a statement as cited by Bloomberg.

The purchase is Stifel's first foray into fund placement, which Bloomberg predicts will let the company win market share as counterparts at other companies, including Credit Suisse and UBS, are being reduced or, as at Blackstone Group, being spun off.

Meanwhile Kruszewski recently told analysts that lower company profit margins were due to the lower margins for contractors at the company's independent brokerage, Sterne Agee Group, which Stifel acquired in June. So reports InvestmentNews.

Stifel's pretax margins as a percentage of net revenue were down this year, from 15.2% in 2014 to 14% for the first nine months of 2015 and to 12.2% for the third quarter, according to the company's investor presentation materials, InvestmentNews notes.

The company will continue to "evaluate" how the Sterne Agee part of the business affects overall profit margins. But Kruszewski said he doesn't plan to ditch the IBD -- even if, as InvestmentNews points out, the unit is a bit of a "hodge podge."

Indeed, Sterne Agee is still digesting WRP Investments, which it acquired in 2014. Meanwhile, Stifel just finished buying Century Securities Associates in June and recently said it would take over the US wealth-management arm of the UK bank Barclays. But InvestmentNews says Kruszewski won't consider lowering broker payouts to rein in costs.

"In the majority of our deals we improve margins without impacting advisor pay," Mr. Kruszewski told InvestmentNews in a separate interview. And, with reference to the Sterne Agee acquisition, he expects broker productivity to improve "through synergies" -- and margins to follow suit.

Stifel's revenue for its retail brokerage unit was $169.3 million for the third quarter, a 7.5% increase over the same quarter last year, and a 6.6% increase over the second quarter this year, which saw a significant market step-back, observes the news publication.



How to work infrastructure funds into clients' portfolios

Worldwide, infrastructure spending is expected to grow to over $9 trillion per year by 2025, up from $4 trillion in 2012. Overall, global spending on transportation, power generation, telecommunications networks, public facilities and other infrastructure over the next decade is estimated at nearly $78 trillion.

While this building boom potentially will drive economic growth and job creation in many regions, it can have an equally powerful effect in building wealth for investors who make infrastructure a core holding in their portfolios.

For the past few years, questions have been raised about whether infrastructure is truly an asset class. As infrastructure represents a distinct set of assets, that issue seems largely settled. However, it is important to ask how financial advisers and their clients can best allocate to this increasingly important class.