june 2018 edition - suredividend.com · buckeye partners is a midstream energy master limited...

Sure Retirement Newsletter

HIGH-YIELD, HIGH-QUALITY INVESTMENTS

June 2018 Edition

By Ben Reynolds, Nick McCullum, & Bob Ciura

Edited by Brad Beams

Published on June 10th, 2018

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Table of Contents

Opening Thoughts - What Drives Pipeline MLP Value? - ........................................................ 3

The Retirement Top 10 – June 2018 ........................................................................................... 4

Analysis of Top 10 Securities ....................................................................................................... 5

Buckeye Partners LP (BPL) ........................................................................................................ 5

Owens & Minor Inc. (OMI) ........................................................................................................ 7

Sunoco LP (SUN) ....................................................................................................................... 9

Invesco Ltd. (IVZ) .................................................................................................................... 11

AT&T Inc. (T) .......................................................................................................................... 13

Energy Transfer Partners LP (ETP) .......................................................................................... 15

Altria Group Inc. (MO) ............................................................................................................. 17

Omega Healthcare Investors Inc. (OHI) ................................................................................... 19

R.R. Donnelley & Sons Co. (RRD) .......................................................................................... 21

Enterprise Products Partners LP (EPD) .................................................................................... 23

Closing Thoughts –Dividends & Capital Gains– ..................................................................... 25

List of Investments by Sector ..................................................................................................... 26

List of Investments by Rank ...................................................................................................... 29

List of Past Recommendations & Ranking Criteria ................................................................ 31

Portfolio Building Guide ............................................................................................................ 33

Examples ................................................................................................................................... 33

Tax Guide .................................................................................................................................... 34

Corporations .............................................................................................................................. 35

Master Limited Partnerships (MLPs)........................................................................................ 36

Real Estate Investment Trusts (REITs)..................................................................................... 37

Business Development Companies (BDCs) ............................................................................. 38

Glossary of Common Terms & Acronyms ............................................................................... 39

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Opening Thoughts - What Drives Pipeline MLP Value? -

Oil pipeline MLPs often rank in the Top 10 of The Sure Retirement Newsletter. A disproportionate

amount of focus for pipeline MLPs is put onto their legal structure instead of what really drives

value – the underlying business and assets.

Pipeline MLPs transport oil, gas, and refined products from the point of production to the point of

distribution. These MLPs make money by charging oil producers a fee for using their pipelines.

Fees are typically charged either on ‘pipeline capacity reservations’ - which do not depend on the

amount of oil that goes through the pipeline - or charged based on actual throughput.

Pipelines have a significant advantage over competing oil transportation choices. Estimates of the

cost to transport a barrel of oil for competing transportation sources are below1:

• $5 by pipeline

• $10 to $15 by rail

• $20 by truck

Pipelines are the most efficient way to transport oil. With that said, they are often the slowest,

require the most capital in advance, and are the least flexible. Still, pipelines provide a significant

cost advantage over competing transportation choices for energy companies. Economies tend

toward efficiency, making pipelines a valuable asset in the U.S. economy.

Like utilities, rails, and roads; pipelines enjoy a partial geographic monopoly. When a pipeline

connects point A to point B, it makes little economic sense to build a competing pipeline and

compete on price. Additionally, pipelines remain in operation for decades. Most are designed to

have operational lives of ~50 years.

Simply put, the value of any specific pipeline is the sum of its future cash flows discounted back to

present value. With long operating lives, partial geographic monopolies, and a clear economic

incentive (lowest distribution cost) for their use, pipelines are likely to generate strong cash flows

for decades.

MLPs typically have high yields and pay out the bulk of their cash flows as distributions to

unitholders. This is good news for income investors as they typically get the lion’s share of cash

which pipeline assets generate.

This leaves little money left to grow (build new pipelines). Similar to REITs, MLPs typically tap

debt and equity markets to fund growth. This means pipelines seek to find the cheapest source of

capital available and build projects with higher rates of return. The difference between cost of

capital and return on the investment is what creates value for unitholders on top of distributions.

The pipeline MLP sector has experienced significant volatility recently. Understanding the

economic value embedded in these entities will be very helpful in deciding to keep their securities

in your portfolio through any additional volatility moving forward. 1 Pipelines Rail & Trucks, page 3

https://www.strata.org/pdf/2017/pipelines.pdf

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The Retirement Top 10 – June 2018

Name Type

Price Fair

Value Yield Payout Growth2 Beta

Buckeye Partners (BPL) MLP $36 $53 13.9% 110% 6.0% 1.97

Owens & Minor (OMI) Stock $16 $29 6.5% 52% 8.0% 1.84

Sunoco (SUN) MLP $26 $38 12.6% 82% 4.7% 1.84

Invesco (IVZ) Stock $28 $41 4.3% 44% 6.0% 0.83

AT&T (T) Stock $34 $46 5.9% 58% 4.7% 0.40

Energy Transfer Partn. (ETP) MLP $19 $25 11.9% 87% 3.0% 1.85

Altria Group (MO) Stock $58 $65 4.9% 74% 7.0% 0.80

Omega Healthcare (OHI) REIT $31 $37 8.7% 85% 4.5% 0.06

R.R. Donnelley & Sons (RRD) Stock $7 $11 8.5% 62% 5.0% -1.36

Enterprise Products (EPD) MLP $29 $35 5.9% 67% 3.0% 1.17

Notes: The ‘Price’ column shows a recent price of the security. The ‘Fair Value’ column shows

our estimate of the company’s per-share fair value. True fair value is unknowable. The ‘Payout’

column uses earnings, funds from operations, or distributable cash flow in the denominator. The

numerator is the security’s payment to its owner.

Two recommendations have changed from last month. Senior Housing Properties Trust (SNH) and

Energy Transfer Equity (ETE) were replaced by Sunoco (SUN) and R.R. Donnelley & Sons

(RRD). The stability of the Top 10 list shows the ranking method is consistent, not based on rapid

swings. Remember: Securities that fall out of the Top 10 are holds, not sells.

Notes: Dividend or distribution yields are used for valuation in some of the individual company

analyses below instead of price-to-earnings (P/E) ratios, which are not meaningful for MLPs and

REITs. The ranking criteria for the Top 10 list and requirements for inclusion in The Sure

Retirement Newsletter are derived from The 8 Rules of Dividend Investing and The Sure Analysis

Research Database.

An equal weighted portfolio of the Top 10 has the following characteristics:

Payout Ratio: 72%

Dividend or Distribution Yield: 8.3%

Growth Rate: 5.2%

2 Growth estimates are our analyst forecasts from The Sure Analysis Research Database.

http://www.suredividend.com/8-rules-dividend-investing/

http://www.suredividend.com/sure-analysis-subscribe/



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Analysis of Top 10 Securities

Buckeye Partners LP (BPL) Key Statistics Ratios & Metrics

Distribution Yield: 13.9% 10 Year Distribution Growth Rate: 3.9%

Most Recent Annual Distribution Increase: 4.1% Sector: Energy

Distribution History: 19 years of increases Business Type: MLP

Ex-Distribution Date: 8/10/18 (est.) Payment Date: 8/21/18 (est.)

Overview & Current Events

Buckeye Partners is a midstream energy master limited partnership (MLP). Its operations include the

storage and transportation of oil and gas. Buckeye has approximately 6,000 miles of pipelines and

more than 135 liquid petroleum product terminals with over 176 million barrels of total storage capacity. Approximately 95% of EBITDA is derived from fee-based sources. Buckeye’s pipelines and

terminals are located in the East Coast, Midwest, and Gulf Coast regions of the U.S. It also has a

significant international presence, with a 50% interest in VTTI.

In early May, Buckeye reported (5/4/18) first-quarter financial results. Revenue increased 21.7% to $1.18 billion, beating expectations by $275 million. However, adjusted EBITDA declined 5.7% from

last year’s quarter. Adjusted EBITDA rose 0.8% in the company’s domestic pipelines and terminals

segment thanks to strong volumes; but the Global Marine Terminals segment reported a 10% decline in

segment EBITDA, reflecting weak storage demand. Segment utilization fell from 99% to 88% year-

on-year. Overall, Buckeye’s distributable cash flow fell 11% for the quarter.

Growth Prospects & Safety

Buckeye’s growth will be fueled by new projects. For example, Buckeye recently acquired the

remaining 20% of the Gulf Coast regional hub, which includes a Corpus Christi terminal. Buckeye

initially spent $860 million to acquire an 80% stake in the project. Separately, Buckeye also closed an

agreement with BP to support a 480 million-barrel expansion of its storage capacity in Chicago.

Another project set to ramp up is the Michigan/Ohio expansion project, for which the partnership has secured 10-year commitments from customers totaling 50,500 barrels per day. Phase two of the project

should be completed by 2019 and is projected to add 40,000 additional barrels per day of capacity.

Buckeye’s distribution safety has deteriorated over the past year. Buckeye reported a distribution

coverage ratio of 1.0 for 2017, but coverage fell to 0.91 in the first quarter. This means the company did not generate enough distributable cash flow to pay its distribution in the first quarter. Importantly,

Buckeye’s CEO recently stated, “our Board of Directors remain committed to our current distribution

policy” and “we have no intention of cutting Buckeye’s distribution.”

Valuation

We expect Buckeye will generate EBITDA-per-unit of $6.77 in 2018. As a result, the stock trades for

a price-to-EBITDA ratio of just 5.4. This is a low valuation, which indicates a high level of negative

sentiment, as does the 13%+ yield. Over the past five and ten years, Buckeye had an average distribution yield of approximately 7%. We estimate a fair value price of $53 for Buckeye units.

With a low valuation and extremely high dividend yield, the total return potential for Buckeye is quite

attractive here. We believe the stock could generate returns of 3%-4% from valuation changes each year, along with 5%-6% annual EBITDA growth. Combined with the 13.9% yield, total annual returns

could reach 22% per year for Buckeye investors.

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Buckeye Partners (BPL) Dividend Yield History

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Owens & Minor Inc. (OMI)

Key Statistics, Ratios & Metrics Dividend Yield: 6.5% 10 Year Dividend Growth Rate: 11.5%

Most Recent Annual Dividend Increase: 0.8% Sector: Healthcare

Dividend History: 20 years of increases Business Type: Stock

Ex- Dividend Date: 6/14/18 Payment Date: 7/2/18


Owens & Minor is a healthcare distribution, transportation, and logistics company. The company

provides healthcare products for hospitals and other medical centers. In all, Owens & Minor distributes

approximately 200,000 medical and surgical supplies to roughly 4,400 hospitals. Its other clients

include group purchasing organizations, the federal government, and at-home healthcare patients.

In early May, Owens & Minor released (5/10/18) financial results for the second quarter of fiscal 2018.

Consolidated revenues increased by 1.9% while GAAP earnings-per-share declined to $0.13 from

$0.31 in the prior year’s period. Excluding one-time accounting charges, results were far better.

Adjusted earnings-per-share of $0.43 fell slightly from the $0.44 reported in the prior year’s period.

More recently, Owens & Minor announced (6/4/18) that its CFO, Richard A. Meier, is leaving the

company to “pursue other opportunities.” A national firm has been engaged to search for a permanent replacement. In the meanwhile, Robert K. Snead, the current Group Vice President of Finance –

Global Solutions, has assumed the role of interim CFO. In addition, Michael Lowry, Owens &

Minor’s Senior Vice President, Corporate Controller, has been named the company’s Chief Accounting

Officer. This follows a very tumultuous time in the company’s C-suite. Owens & Minor’s CEO, CFO,

Chief Information Officer, Chief Administrative Officer, and General Counsel have each been with the company for 3 years or less. .


Owens & Minor’s future growth will come from expansion into new products and services, primarily

through acquisitions. For example, Owens & Minor recently closed on the acquisition of Byram

Healthcare, a distributor of direct-to-patient medical supplies that added $118 million to Owens &

Minor’s first-quarter revenue. The company paid $380 million for the business unit. More recently,

Owens & Minor closed on the $710 million acquisition of Halyard Health’s surgical and infection prevention business (S&IP). We believe that further acquisition-based growth is likely.

Despite Owens & Minor’s high yield, its dividend is very safe. The company’s current dividend

payment combined with 2018 earnings estimates imply a forward dividend payout ratio of just 52%, giving plenty of room for additional dividend growth if earnings stall temporarily.

Valuation

Consensus estimates call for earnings-per-share of $2.00 for Owens & Minor in 2018. Using this

figure, Owens & Minor is trading at a price-to-earnings ratio of just 8.0. For context, the company’s

10-year average price-to-earnings ratio is 18.7. We believe the company deserves a price-to-earnings

ratio of between 14 and 15, which gives a fair value estimate of $29. Between valuation expansion,

earnings growth, and the company’s 6.5% dividend yield; we believe Owens & Minor has the potential to deliver 20%+ annualized returns from its current price point.

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Owens & Minor (OMI) Dividend Yield History

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Sunoco LP (SUN)

Key Statistics, Ratios & Metrics Distribution Yield: 12.6% 10 Year Distrib. Growth Rate: 13.5% since ‘13


Distribution History: 14 increases since 2012 Business Type: MLP

Ex- Distribution Date: 8/7/18 (est.) Payment Date: 8/15/18 (est.)


Sunoco is a master limited partnership (MLP) that distributes fuel products through its wholesale and

retail business units. The wholesale unit purchases fuel products from refiners and sells those products

to both its own and independently-owned dealers. The retail unit operates stores where fuel as well as

other products are sold to customers. Sunoco was spun off from Susser Holdings as Susser Petroleum

Partners in 2012 and changed its name to Sunoco LP (and its ticker to SUN) in October of 2014. Sunoco’s General Partner is owned by Energy Transfer Equity LP (ETE).

In early May, Sunoco announced (5/9/18) first-quarter financial results. Total revenue increased 34%

from the same quarter a year ago. The increase was the result of the average selling price of fuel being

higher than last year. Adjusted EBITDA fell from $155 million to $109 million. The decrease was primarily attributable to a shift in volumes away from the retail segment to the wholesale segment, and

the adoption of a new revenue recognition model. Distributable cash flow (DCF), as adjusted, rose

10.3% year-over-year, due to lower interest expenses and lower maintenance capital spending.


Sunoco’s main growth strategy is through acquisitions. In April 2018, Sunoco acquired 26 retail sites

from 7-Eleven, and also acquired the wholesale fuel distribution business and terminal assets from

Superior Plus Corporation. It raised the cash for these acquisitions by divesting many company-

operated sites to 7-Eleven. Last year, Sunoco’s EBITDA-per-unit grew by 15%, despite the issuance of new shares. Through its asset restructuring, Sunoco has become more dependent on its fuel

wholesale business, where it profits from significant scale.

In terms of safety, Sunoco recently refinanced long-term debt at significantly lower rates, which will

result in lower interest expenses going forward. As a result of these actions, Sunoco lowered its debt-to-adjusted-EBITDA ratio to 3.82x at the end of the first quarter.

Distribution coverage ratio for the first quarter was 1.0x, meaning the company barely generated

enough cash flow to pay its distribution. The distribution coverage ratio on a trailing 12-month basis

was 1.22x. The deteriorating coverage ratio in the first quarter is a concern, and investors should closely monitor Sunoco’s results in future quarters to make sure coverage remains sufficient.

Valuation

Sunoco generated EBITDA-per-unit of $7.34 in 2017. We are forecasting slight operating EBITDA

growth this year. The decline in the first quarter was primarily due to a new revenue recognition model, which is a non-recurring factor that does not impact the long-term operations of the company.

Based on 2018 expectations of 3%-4% EBITDA growth, Sunoco could have EBITDA-per-unit of

$7.56-$7.63 for 2018. At the midpoint of this range, the stock trades for a price-to-EBITDA ratio of

3.5. Using a fair value estimate of 5 times EBITDA, we believe the stock is undervalued.

Valuation changes could result in 7% annual returns. In addition to at least 3% annual EBITDA

growth and the 12.6% distribution yield, total returns could exceed 22% going forward.

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Invesco Ltd. (IVZ)


Most Recent Annual Dividend Increase: 7.1% Sector: Financials

Dividend History: Steady or increasing since ‘08 Business Type: Corporation

Ex-Dividend Date: 8/15/18 (est.) Payment Date: 8/31/18 (est.)


Invesco is an investment management firm that provides a wide variety of asset management,

investing, and financial planning products and services. The company serves retail, institutional, and

wealth management customers around the world. Invesco has more than 7,000 employees, serves

clients in more than 150 countries, and trades with a market capitalization of $11.6 billion.

In late April, Invesco reported (4/26/18) first-quarter financial results. Revenue of $958 million missed

analyst expectations by $20 million but still increased 10.5% year-over-year. Earnings-per-share of

$0.67 rose 10% from the same quarter a year ago and beat analyst expectations by $0.01 per share.

Separately, Invesco announced (5/10/18) April assets under management (AUM) of $934 billion. Growth was due to the Guggenheim acquisition and favorable market returns, partially offset by net

long-term outflows and foreign exchange fluctuations.

More recently, Invesco announced (6/6/18) the acquisition of U.K.-based Intelliflo, a market-leading

provider of advisor-focused digital solutions. The transaction was immaterial to the firm’s financial

position and the terms of the deal were not disclosed to shareholders.


AUM growth is the major performance driver for investment management firms like Invesco. The

strong recent performance of the U.S. and international markets has contributed to stronger demand for

investment products. If the markets continue to do well, Invesco’s AUM should continue to rise.

Invesco is also pursuing growth through acquisitions. In addition to the Intelliflo purchase, Invesco recently completed (4/6/18) the acquisition of Guggenheim Investments’ ETF business for $1.2 billion.

This acquisition will enhance Invesco’s product offerings in the rapidly-growing and low-cost ETF

industry, positioning the firm for growth in an increasingly fee-sensitive world.

Invesco has significant competitive advantages in the asset management industry and operates with a

sound balance sheet. The company has credit ratings of A2 and A from Moody’s and Standard &

Poor’s, respectively. Strong credit ratings allow an investment management firm to uphold a

reputation of financial integrity, which helps retain and grow the client base. Invesco has generated

nine consecutive years of positive long-term net inflows. In addition, the company had a dividend payout ratio of 44% last year. Still, investors should note that the performance of asset management

firms will fluctuate along with the financial markets due to their dependence on AUM.

Valuation

Analysts expect Invesco to generate earnings-per-share of $2.85 in 2018. Based on this, Invesco stock

trades for a price-to-earnings ratio of 9.7. We believe a fair valuation for Invesco is a price-to-earnings ratio of 14-15. Our fair value price estimate for Invesco is approximately $41. The stock currently

trades at $28. Over the next five years, a rising valuation could add 7%-8% to total returns. In

addition, we believe Invesco can reasonably generate earnings growth of 6%. When accounting for

with the firm’s 4.3% dividend yield, Invesco’s total returns could reach 17% per year.

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Invesco Ltd. (IVZ) Dividend Yield History

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AT&T Inc. (T)


Most Recent Annual Dividend Increase: 2.0% Sector: Telecommunications

Dividend History: 34 years of increases Business Type: Corporation



AT&T is the largest telecommunications company in the United States, with a market capitalization of

over $200 billion. It offers a variety of telecom services, including wireless and cable TV, as well as

satellite TV through its subsidiary DirecTV. AT&T operates through the following business segments:

Business Solutions, Entertainment Group, Consumer Mobility, and International.

In late April, AT&T reported (4/25/18) first-quarter financial results. AT&T reported revenue of

$38.04 billion and earnings-per-share of $0.85. Both figures came up short of expectations. Revenue

and earnings-per-share missed analyst estimates by $1.27 billion and $0.02 per share, respectively.

Revenue declined 2.3% from the same quarter a year ago. AT&T saw sales growth of wireless

equipment and strategic business services, but this was more than offset by declines in legacy wireline services, domestic video, and wireless service revenues. For the quarter, AT&T had 3.2 million total

wireless net adds, and churn of just 0.84%, the lowest first-quarter churn rate in the company’s history.


AT&T’s major growth catalyst is the pending $85 billion acquisition of content giant Time Warner.

Time Warner has a number of strong media properties, including TBS, TNT, HBO, and the Warner

Bros. movie studio. If the Time Warner acquisition receives approval, the combined company would

have over 140 million mobile subscribers, and another 45 million video subscribers, worldwide.

However, in November 2017 the Department of Justice sued to block the proposed transaction, on antitrust grounds. A final decision is expected on June 12th. AT&T expects annual cost synergies of

$1.5 billion by the third year after closing if the deal is approved.

Outside of the Time Warner acquisition, AT&T expects wireless service revenue to return to growth on

a comparable basis this year. It also expects to be first to release standards-based mobile 5G in 2018.

In terms of safety, AT&T has a highly secure dividend payout. AT&T is a Dividend Aristocrat, with

over 30 consecutive years of dividend growth. Based on 2018 earnings guidance, the company is on

pace for a dividend payout ratio of approximately 58%.

One potential risk factor for AT&T is rising interest rates, as the company is highly leveraged, and will

incur even more debt if and when the Time Warner deal gets approved. AT&T ended the 2018 first

quarter with $133.7 billion of long-term debt. Despite this high leverage, AT&T has an investment-

grade credit rating of BBB+ from S&P, which helps keep its cost of capital manageable.

Valuation

We expect AT&T to generate adjusted earnings-per-share of $3.45 in 2018. Based on this, AT&T

stock currently trades for a price-to-earnings ratio of just 9.5, compared with an average of 13.4 over

the past 10 years. We believe the stock is significantly undervalued. Our fair value estimate for AT&T

stock is a share price of $46. The combination of valuation changes and earnings growth should provide annual returns of 10% for AT&T stock. Adding in the ~6% dividend yield means total returns

could reach 16% per year for AT&T shareholders moving forward.

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AT&T (T) Dividend Yield History

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Energy Transfer Partners LP (ETP) Key Statistics, Ratios, & Metrics






Energy Transfer Partners is the second-largest energy master limited partnership (MLP) based on

market capitalization, behind Enterprise Products Partners (EPD). The partnership operates more than

71,000 miles of natural gas, natural gas liquids (NGL), and crude and refined products pipelines. ETP is a primary operator and financier of the notable Rover and Dakota Access Pipeline (DAPL) projects.

In early May, Energy Transfer Partners reported (5/9/18) financial results for the first quarter of 2018.

The partnership beat expectations for both revenue and earnings. Adjusted EBITDA of $1.88 billion

increased by $436 million over the prior year’s period while net income of $879 million increased by a remarkable $486 million year-on-year. A number of factors contributed to Energy Transfer Partners’

strong performance, including robust results from the crude oil transportation and services segment and

a $172 million pre-tax gain on Sunoco LP (SUN) units that were repurchased by Sunoco from ETP in

February. In addition, the partnership reported a distribution coverage ratio of 1.15x in the quarter.

More recently, Energy Transfer Partners announced (6/5/18) that the partnership issued $3.0 billion in

senior notes; composed of $500 million of 4.20% notes due 2023, $1.0 billion of 4.95% notes due

2028, $500 million of 5.80% notes due 2038, and $1.0 billion of 6.00% notes due 2048. Each of the

offerings sold at slight discounts to their face value. The proceeds will be used to repay in full a basket of existing debt securities; including 2.5% notes due June 15th, 6.7% notes due July 1, and 7.00% notes

due June 15th. You can view a tabular summary of the debt refinancing here. We believe that this was

a sound move, as it raised additional capital for the company and meaningfully lengthened its debt

maturity profile while only increasing the blended average interest rate by 20 basis points.


Energy Transfer Partners’ future growth will be derived from new projects such as the Rover pipeline.

The partnership owns 33% of Rover, which is now capable of transporting more than 1.7 billion cubic

feet per day. Separately, Energy Transfer Partners’ Red Bluff Express pipeline will have a capacity of

at least 1.4 billion cubic feet per day with guaranteed long-term commitments supporting the project’s cash flow. It is expected to come online in the second quarter of 2018. In all, Energy Transfer Partners

has $10 billion worth of new projects coming online from mid-2017 through mid-2019.

Despite the partnership’s exceptionally high yield, Energy Transfer Partners’ distribution is secure.

The partnership reported a distribution coverage ratio of 1.15x in the most recent quarter. Prior to that, the partnership’s distribution coverage ratio for the fourth quarter of 2017 was 1.30x. With that said,

investors should closely monitor the partnership’s financial position. Energy Transfer Partners has a

barely-investment grade BBB- credit rating from S&P and a similar Baa2 rating from Moody’s.

Valuation

Energy Transfer Partners has traded at an average distribution yield of 9.1% over the last 5 years. The

partnership’s current yield of 11.9% indicates that it is undervalued at current prices. A yield of 9%

combined with the partnership’s current quarterly distribution implies a fair value of $25 for this

energy MLP. Units currently trade hands for about $19.

https://www.suredividend.com/wp-content/uploads/2018/06/ETP-Debt-Refinancing-Summary.png

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Energy Transfer Partners (ETP) Dividend Yield History

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Altria Group Inc. (MO)


Most Recent Annual Dividend Increase: 14.8% Sector: Consumer Staples

Dividend History: 52 increases in 49 years Business Type: Corporation

Ex-Dividend Date: 6/14/18 Payment Date: 7/10/18


Altria Group was founded in 1919 but can trace its roots back to George Weyman (1822), Philip

Morris (1847), and John Middleton (1856). Today, it is a consumer staples giant. It sells the Marlboro

cigarette brand in the U.S., and a number of other non-smokable brands, including Skoal, Copenhagen,

and Ste. Michelle. Altria also has a 10% ownership stake in global beer giant Anheuser Busch InBev.

In late April, Altria released (4/26/18) strong first-quarter earnings. Quarterly revenue of $4.67 billion increased 1.7%, and earnings-per-share of $0.95 rose 30% year-over-year. Revenue and earnings-per-

share beat analyst expectations by $40 million and $0.03 per share, respectively. Revenue in Altria’s

smokable products declined 0.8% for the quarter, reflecting lower volumes, partially offset by price

increases. Elsewhere, Ste. Michelle grew volume and revenue with wine shipment volume up 6.1%.

Equity earnings from its Anheuser Busch InBev investment were $225 million in the first quarter.


One significant challenge for Altria’s future growth is the decline in smoking rates. Last quarter

Altria’s cigarette shipment volume declined 4.2%, while the cigarette industry overall declined 5.5%. As fewer people smoke cigarettes, Altria faces a tough road ahead, as its core Philip Morris USA

segment represents over 80% of the company’s total revenue and profit. We believe Altria still has

positive long-term growth potential. With an addictive product and the top brand (Marlboro) in the

industry, Altria can continuously raise cigarette prices each year to drive revenue growth. Altria

expects earnings growth of 15%-19% in 2018.

In addition, Altria has invested heavily in new products. Altria’s non-combustible product portfolio

includes e-vapor and e-cigarettes. Altria is also awaiting regulatory approval from the Food & Drug

Administration for its new reduced-risk product line named IQOS. If Altria receives FDA approval,

the company is fully prepared to roll out the product line nationwide.

Altria has a number of competitive advantages that make it one of the safest stocks in this month’s Top

10. It operates in an extremely regulated industry that discourages new competitors. In addition, Altria

has compelling brand recognition among the domestic smoking population. Lastly, Altria’s

manufacturing and distribution costs are low thanks to economies of scale. The company had a gross margin of 47% in 2017. Its dividend is also very safe. Altria maintains a target dividend payout ratio

of 80% of annual adjusted earnings-per-share.

Valuation

Altria reaffirmed its 2018 earnings-per-share guidance with the release of first quarter earnings. The company continues to expect earnings-per-share in the range of $3.90 to $4.03 for the full year. Using

the midpoint of this guidance band ($3.97), Altria is trading at a current price-to-earnings ratio of 14.3.

For context, Altria traded at an average price-to-earnings ratio of 16.2 over the past decade, which

implies a fair value of $65 for this high-quality dividend stock. We believe that through a combination

of 6%-8% annual earnings growth, the 4.9% dividend yield, and 2%-3% annual return from valuation expansion, Altria could generate annual total returns of 13%-15%.

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Altria Group (MO) Dividend Yield History

19

Omega Healthcare Investors Inc. (OHI) Key Statistics, Ratios, & Metrics


Most Recent Annual Distribution Increase: 4.8% Sector: Healthcare Real Estate

Distribution History: 15 years of increases Business Type: REIT



Omega Healthcare Investors is the largest publicly-traded REIT in the United States dedicated to

owning and operating skilled nursing facilities (SNFs). The trust’s portfolio is comprised of

approximately 85% SNFs and 15% Senior Housing Facilities (SHFs). Omega operates ~1,000 properties in 42 U.S. states and the United Kingdom. These properties are run by 77 independent

operators.

In early May, Omega Healthcare Investors reported (5/7/18) financial results for the first quarter of

2018. Operating revenues fell 5.0% to $220.2 million while adjusted funds from operations of $0.78 per share fell from the $0.86 reported in last year’s period. Omega Healthcare is struggling through

some tenant issues that are negatively impacting the trust’s financial performance. The trust recorded

$198.2 million in impairment charges in 2017 due to certain affiliates of tenant Orianna Health

Systems declaring Chapter 11 bankruptcy. Importantly, Omega’s first quarter earnings release stated “Orianna recommenced partial rent payments in April,” and “we expect to have further clarity in the

near future” regarding the situation. Despite these problems, Omega beat analyst expectations (which

were quite pessimistic), which resulted in a modest rise in unit price following the announcement.

The trust also continued to actively manage its finances and property portfolio in the quarter. Omega Healthcare Investors sold 14 facilities and had 3 mortgage loans repaid in the three-month reporting

period, which generated $98.4 million in net cash proceeds. In addition, the trust invested $38 million

in capital expenditures and completed $30 million in new investments. Importantly, Omega’s CFO

made the following statement in the earnings release: “Our better than expected first quarter results

largely reflect the timing of new investments and asset sales.” Accordingly, the trust reaffirmed its 2018 financial guidance for adjusted funds from operations of $2.96 to $3.06 per diluted share.


Despite the recent difficulties experienced by Omega Healthcare Investors, the trust should still deliver

satisfactory growth over the long run. Industry tailwinds will be a major driver of this growth. The aging U.S. population is a meaningful trend. The population of 85-year-old people in the United States

is expected to grow by approximately 50% over the next 15 years. As the 4th largest publicly-traded

healthcare REIT, Omega is well-positioned to benefit from this change.

In addition, investors should note that Omega’s distribution continues to be well-covered by its cash flows despite its recent operational difficulties. The trust currently pays a quarterly distribution of

$0.66 and generated adjusted funds from operations of $0.78 last quarter. This implies a distribution

coverage ratio of 1.18, equivalent to a cash flow payout ratio of approximately 85%.

Valuation

Omega Healthcare Investors’ average distribution yield over the last 5 years is 6.6% and over the last

10 years is 6.9%. The trust’s current distribution yield of 8.7% indicates that it is significantly

undervalued at current prices. We estimate a fair value of $37 for Omega Healthcare, and it is

currently trading for under $31 per share.

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Omega Healthcare Investors (OHI) Dividend Yield History

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R.R. Donnelley & Sons Co. (RRD) Key Statistics, Ratios, & Metrics

Dividend Yield: 8.5% 10 Year Dividend Growth Rate3: N/A

Most Recent Annual Dividend Increase3: N/A Sector: Industrials

Dividend History: 15 years of increases Business Type: Corporation



R.R. Donnelley & Sons is a global provider of multichannel business communications services and

marketing solutions. The company has more than 50,000 clients and 43,000 employees in 34 countries.

R.R. Donnelley’s corporate structure has changed significantly in the past few years due to two

material business spin-offs that were completed on October 1, 2016. More specifically, the company

spun off two subsidiaries: LSC Communications (LKSD), its publishing and retail-centric print

services and office products business; and Donnelley Financial Solutions (DFIN), its financial

communications and data services business. R.R. Donnelley kept a 19.25% stake in each business after the spin-offs before selling the stakes in tax-free transactions shortly after the special event.

Immediately after the spin-offs, the new RRD performed a reverse 1 for 3 stock split.

In early May, R.R. Donnelley reported (5/1/18) financial results for the first quarter of 2018. Net sales grew 2.9% and organic sales grew 1.3% - the second consecutive quarter of organic revenue growth.

The company reported a net loss of $9.6 million, which improved significantly over the $50.1 million

loss reported in the prior year’s period and also includes an $8.3 million charge related to a retail client

bankruptcy. All of this boiled down to a $0.10 per share loss. Looking ahead, performance should

improve significantly. The company is guiding for adjusted earnings-per-share between $0.90 and $1.20 for the full year of fiscal 2018. Shares dropped by about 20% following the announcement.


R.R. Donnelley’s future value accrual to shareholders is expected to come largely from its aggressive

deleveraging program. After the spin-offs, the company used many of the proceeds to pay down debt. Still, the company’s leverage ratio is well above management’s target. R.R. Donnelley had $1,969.4

million of total debt and $259.4 million of cash and equivalents at the end of the most recent period.

The company generated $417.9 million of EBITDA in 2017, for a net-debt-to-EBITDA ratio of 4.09x.

R.R. Donnelley’s target leverage ratio is 2.25x-2.75x. Accordingly, we believe that debt reduction will

be a focus of this company’s management team for the foreseeable future.

R.R. Donnelley’s remarkably low price-to-earnings ratio allows the company to simultaneously have a

very conservative payout ratio and a high dividend yield. Its annual dividend payments are $0.56.

Using the bottom of the 2018 guidance band ($0.90), this implies a payout ratio of just 62%.

Valuation

With the release of its first quarter earnings report, R.R. Donnelley reaffirmed financial guidance for

the full year of fiscal 2018. The company continues to expect adjusted earnings-per-share between

$0.90 and $1.20. Using the midpoint of this guidance band ($1.05), the company is trading at a price-

to-earnings ratio of just 6.3. R.R. Donnelley traded at an average price-to-earnings ratio of 10.6 in the

ten years prior to its spin-off, which implies a fair value of $11. Shares currently trade under $7.

3 R.R. Donnelley has not increased its dividend following the spin-offs of LKSD and DFIN, although this was not a dividend cut in the

traditional sense.

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R.R. Donnelley & Sons (RRD) Dividend Yield History

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Enterprise Products Partners LP (EPD)

Key Statistics, Ratios & Metrics Distribution Yield: 5.9% 10 Year Distribution Growth Rate: 5.4%





Enterprise Products Partners is an oil and gas master limited partnership MLP and the largest energy

MLP by market capitalization. It operates in the midstream segment, with services including storage

and transportation of energy. The partnership owns ~50,000 miles of pipelines, 260 million barrels of storage capacity for refined/crude oil, and 14 billion cubic feet of natural gas storage capacity.

In late April, the partnership reported (4/30/18) financial results for the first quarter. Revenue

increased 27% in the first quarter to $9.3 billion and beat analyst expectations by $1.39 billion.

Adjusted EBITDA and Distributable Cash Flow (DCF) increased 19% and 23%, respectively, from the same quarter a year ago. The company saw strong results in its pipeline segment, thanks to volume

increases in crude oil, NGL and natural gas production from the Permian basin, as well as the Rocky

Mountains and Haynesville Shale regions. The best-performing segment was Petrochemical & Refined

Products Services, which grew operating income by 50% to $272 million for the quarter.


For a midstream operator like Enterprise Products, the most important growth going forward are new

projects, and exports. Enterprise Products retained $867 million of distributable cash flow last year,

and $458 million in the 2018 first quarter, which can be allocated to developing new projects. Enterprise Products has $5.5 billion of growth projects currently under construction. In 2018, it

expects to complete projects totaling $2.7 billion of capital investment.

Exports are a compelling growth catalyst, particularly for liquefied petroleum gas, or LPG. LPG

consists of gases like propane, butane, and methane. Demand for LPG is growing at a high rate across the world, especially in emerging markets like China and India. The International Energy Agency

predicts demand for LPG in China and India will rise by 250,000 barrels-per-day and 350,000 barrels-

per-day, respectively. Enterprise has 1,150 LPG cargos contracted through 2020.

In terms of safety, Enterprise Products Partners is the safest MLP recommended in this newsletter. The company has an investment-grade credit rating of BBB+ from Standard & Poor’s and Baa1 from

Moody’s, which are better than most MLPs. The distribution coverage ratio was 1.5x in the 2018 first

quarter, which represents excellent coverage. The strong balance sheet allows the company to self-

fund a majority of its growth capital expenditures. Enterprise Products Partners expects to deliver

moderate distribution growth and self-fund the equity portion of its capital expenses through 2019.

Valuation

We expect Enterprise Products to generate EBITDA-per-unit of $2.64 in 2018. As a result, the stock

trades for a price-to-EBITDA ratio (an appropriate equivalent to earnings-per-share for an MLP) of

11.1. Enterprise Products Partners seems to be fairly valued, and perhaps slightly undervalued. Our fair value estimate is a unit price of $35. We believe total returns could reach roughly 12% annually,

comprised of a 3%-4% annual return from valuation changes, the 5.9% distribution yield, and 3%

annual EBITDA growth. This is a reasonable EBITDA growth forecast, since the company exceeded

this growth rate in 2017, and has several growth projects set for completion in 2018.

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Enterprise Products Partners (EPD) Dividend Yield History

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Disclaimer

Nothing presented herein is, or is intended to constitute, specific investment advice. Nothing in this newsletter should be construed as a recommendation to follow any

investment strategy or allocation. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. While Sure Retirement/Sure Dividend has used

reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third-party

information presented herein. No guarantee of investment performance is being provided and no inference to the contrary should be made. There is a risk of loss from an

investment in securities. Past performance is not a guarantee of future performance.

Closing Thoughts –Dividends & Capital Gains–

Total returns come from capital gains and dividends. Capital gains are the ‘noisier’ of the two.

Prices fluctuate minute-by-minute in the stock market.

The biggest gains are from capital appreciation (as are the biggest losses). They create more

headlines. But just because capital gains are noisier, that doesn’t mean you should pay more

attention to them…

In fact, dividends have contributed nearly as much to total returns in the S&P 500 as capital

appreciation has over the long run, as the image below shows.

Source: Why Dividends Matter, page 6

Dividends generate real results. What’s more, they are much more stable and predictable than

capital gains. The market can decline 50% in any one year. It’s highly unlikely a portfolio of high-

quality dividend stocks sees income drop by anywhere near that amount.

The advantage to investing in high-yield stocks is that it puts the focus on what matters for long-

term value creation. In the short run, prices fluctuate randomly. In the long run, business growth

and capital returned to shareholders is what matters. Companies cannot pay rising dividends over

time without growing on a per share basis.

In addition, a high payout indicates that a company’s management team is interested in returning

money to shareholders instead of ‘empire building’ - growing for the sake of managing a bigger

company instead of maximizing shareholder returns.

For self-directed investors, focusing on dividends is beneficial as it allows us to ignore short-term

volatility in stock prices. The next time your portfolio behaves in a frightening way, remember to

check your dividend income. In the vast majority of cases, it will be steady or rising – as desired.

Thanks,

Ben Reynolds

The next newsletter publishes on Sunday, July 8th, 2018.

https://www.gafunds.com/wp-content/uploads/2012/11/imdf_WhyDividendsMatter.pdf

26

This information is not personalized advice. It is for informational purposes only. Please see disclaimer at end of newsletter for more.

List of Investments by Sector

Each of the securities with 4%+ yields in the Sure Dividend database are sorted by rank below in

order based on The 8 Rules of Dividend Investing (highest to lowest) based on its GICS sector.

Dividend or distribution yield is included next to each security’s ticker symbol.

Basic Materials 1. Westlake Chemical Partners LP (WLKP) - 6.3%

2. SunCoke Energy Partners LP (SXCP) - 10.2%

3. Ciner Resources LP (CINR) - 9%

4. Enviva Partners LP (EVA) - 8%

5. Compass Minerals Intl. Inc. (CMP) - 4.2%

Communication Services 1. Vodafone Grp. plc (VOD) - 6.7%

2. BCE Inc. (BCE) - 5.6%

3. AT&T Inc. (T) - 6%

4. Verizon Communications Inc. (VZ) - 4.9%

5. Crown Castle Intl. Corp. (CCI) - 4.1%

6. CenturyLink Inc. (CTL) - 12.3%

7. Consolidated Communications Hldgs. Inc. (CNSL) - 13.4%

8. IDT Corp. (IDT) - 5.6%

Consumer Cyclicals 1. GameStop Corp. (GME) - 10.5%

2. Meredith Corp. (MDP) - 4.5%

3. L Brands Inc. (LB) - 6.5%

4. Cedar Fair LP (FUN) - 5.4%

5. Ford Motor Co. (F) - 5%

6. National CineMedia Inc. (NCMI) - 9.4%

7. New Media Inv. Grp. Inc. (NEWM) - 8.4%

8. Bowl America Inc. (BWL.A) - 4.5%

9. Cato Corp./The (CATO) - 5.5%

10. Barnes & Noble Inc. (BKS) - 9.8%

11. Gannett Co. Inc. (GCI) - 6.1%

Consumer Defensive 1. Altria Grp. Inc. (MO) - 5%

2. Vector Grp. Ltd (VGR) - 8.2%

3. Kraft-Heinz Co./The (KHC) - 4.3%

4. Philip Morris Intl. Inc. (PM) - 5.6%

5. General Mills Inc. (GIS) - 4.6%

6. Universal Corp. (UVV) - 4.6%

7. Campbell Soup Co. (CPB) - 4.2%

Energy 1. Energy Transfer Partners LP (ETP) - 11.7%

2. Enterprise Product Partners LP (EPD) - 5.9%

3. Buckeye Partners LP (BPL) - 13.7%

4. NuStar Energy LP (NS) - 15.3%

5. TC PipeLines LP (TCP) - 10.3%

6. Enbridge Inc. (ENB) - 6.7%

7. Holly Energy Partners LP (HEP) - 8.9%

8. Sunoco LP (SUN) - 12.6%

9. Royal Dutch Shell plc (RDS.A) - 5.4%

10. Royal Dutch Shell plc (RDS.B) - 5.2%

11. ONEOK Inc. (OKE) - 4.5%

12. Spectra Energy Partners LP (SEP) - 9.9%

13. CrossAmerica Partners LP (CAPL) - 12.2%

14. Energy Transfer Equity LP (ETE) - 7%

15. Helmerich & Payne Inc. (HP) - 4.4%

16. Western Gas Partners LP (WES) - 7.2%

17. Transmontaigne Partners LP (TLP) - 8.1%

18. Magellan Midstream Partners LP (MMP) - 5.3%

19. Andeavor Logistics LP (ANDX) - 9.3%

20. NuStar GP Holdings LLC (NSH) - 9.4%

21. TOTAL S.A. (TOT) - 4.7%

22. Western Gas Equity Partners LP (WGP) - 6.2%

23. EnLink Midstream Partners LP (ENLK) - 8.9%

24. Phillips 66 Partners LP (PSXP) - 5.4%

25. Delek Logistics Partners LP (DKL) - 10.6%

26. Targa Resources Corp. (TRGP) - 7.5%

27. DCP Midstream LP (DCP) - 7.8%

28. PBF Logistics LP (PBFX) - 9.5%

29. EnLink Midstream LLC (ENLC) - 6.2%

30. Sprague Resources LP (SRLP) - 11%

31. BP plc (BP) - 5.2%

32. Tallgrass Energy Partners LP (TEP) - 8.9%

33. MPLX LP (MPLX) - 6.8%

34. GasLog Partners LP (GLOP) - 8.8%

35. Summit Midstream Partners LP (SMLP) - 14.2%

36. USA Compression Partners LP (USAC) - 11.5%

37. Green Plains Partners LP (GPP) - 10.9%

38. SemGroup Corp. (SEMG) - 7.6%

39. Vermilion Energy Inc. (VET) - 6.1%

40. Enable Midstream Partners LP (ENBL) - 7.6%

41. Cheniere Energy Partners LP (CQP) - 6.2%

42. Black Stone Minerals LP (BSM) - 7%

43. Kinder Morgan Inc. (KMI) - 4.8%

44. Williams Companies Inc./The (WMB) - 5.2%

Financial Services 1. Bank of Nova Scotia/The (BNS) - 4.3%

2. Invesco Ltd (IVZ) - 4.3%

27


3. Canadian Imperial Bank of Commerce (CM) - 4.7%

4. Mercury General Corp. (MCY) - 5.2%

5. PennantPark Floating Rate Capital Ltd (PFLT) - 8.2%

6. Main Street Capital Corp. (MAIN) - 5.9%

7. Westpac Banking Corp. (WBK) - 6.6%

8. Hercules Capital Inc. (HTGC) - 10%

9. HSBC Holdings plc (HSBC) - 5.2%

10. Waddell & Reed Financial Inc. (WDR) - 5%

11. Ares Capital Corp. (ARCC) - 9%

12. BGC Partners Inc. (BGCP) - 6.4%

13. Banco Latinoamericano de Comercio (BLX) - 5.7%

14. AmTrust Financial Srvcs. Inc. (AFSI) - 4.8%

15. Westwood Holdings Grp. Inc. (WHG) - 4.6%

16. Gladstone Inv. Corp. (GAIN) - 7%

17. Golub Capital BDC Inc. (GBDC) - 6.9%

18. Goldman Sachs BDC Inc. (GSBD) - 8.7%

19. Artisan Partners Asset Mgmt. Inc. (APAM) - 7.3%

20. FS Inv. Corp. (FSIC) - 9.7%

21. New York Community Bancorp Inc. (NYCB) - 5.7%

22. Navient Corp. (NAVI) - 4.3%

Healthcare 1. Owens & Minor Inc. (OMI) - 6.4%

2. Patterson Companies Inc. (PDCO) - 4.8%

Industrials 1. R.R. Donnelley & Sons Co. (RRD) - 8.7%

2. Golar LNG Partners LP (GMLP) - 14.7%

3. Macquarie Infra. Corp. (MIC) - 10%

4. Iron Mountain Inc. (IRM) - 6.8%

5. Compass Diversified Holdings LLC (CODI) - 8.6%

6. Nielsen Holdings plc (NLSN) - 4.6%

7. Höegh LNG Partners LP (HMLP) - 10%

8. Icahn Enterprises LP (IEP) - 9.9%

9. KNOT Offshore Partners LP (KNOP) - 9.9%

10. USD Partners LP (USDP) - 13.1%

11. Fortress Transport. & Infra. Investors LLC (FTAI) - 7.5%

12. Dynagas LNG Partners LP (DLNG) - 12.5%

13. Costamare Inc. (CMRE) - 5.3%

Real Estate 1. Omega Healthcare Investors Inc. (OHI) - 8.7%

2. Arbor Realty Trust Inc. (ABR) - 10.5%

3. Welltower Inc. (WELL) - 6.1%

4. Realty Income Corp. (O) - 4.9%

5. Senior Housing Properties Trust (SNH) - 8.9%

6. W.P. Carey Inc. (WPC) - 6%

7. National Health Investors Inc. (NHI) - 5.4%

8. Starwood Property Trust Inc. (STWD) - 8.7%

9. HCP Inc. (HCP) - 6.2%

10. Lexington Realty Trust (LXP) - 8.3%

11. Tanger Factory Outlet Centers Inc. (SKT) - 6.3%

12. Taubman Centers Inc. (TCO) - 4.7%

13. LTC Properties Inc. (LTC) - 5.5%

14. Simon Property Grp. Inc. (SPG) - 4.7%

15. Hospitality Properties Trust (HPT) - 7.4%

16. National Retail Properties Inc. (NNN) - 4.6%

17. EPR Properties (EPR) - 7%

18. Kimco Realty Corp. (KIM) - 6.9%

19. Sabra Health Care REIT Inc. (SBRA) - 8.7%

20. Urstadt Biddle Properties Inc. (UBA) - 4.9%

21. Preferred Apartment Communities Inc. (APTS) - 6.9%

22. STAG Industrial Inc. (STAG) - 5.3%

23. Select Income REIT (SIR) - 9.5%

24. DDR Corp. (DDR) - 9.2%

25. Ventas, Inc. (VTR) - 5.8%

26. New Residential Inv. Corp. (NRZ) - 11.1%

27. Apollo Comml. Real Estate Finance Inc. (ARI) - 9.8%

28. Macerich Co. (MAC) - 5.2%

29. Universal Health Realty Income Trust (UHT) - 4.2%

30. American Campus Communities Inc. (ACC) - 4.4%

31. CorEnergy Infra. Trust Inc. (CORR) - 8.3%

32. VEREIT Inc. (VER) - 7.8%

33. One Liberty Properties Inc. (OLP) - 7%

34. Kite Realty Grp. Trust (KRG) - 7.7%

35. The GEO Grp. Inc. (GEO) - 7.5%

36. Life Storage Inc. (LSI) - 4.3%

37. Hannon Armstrong Sust. Infra. Capital Inc. (HASI) - 7.3%

38. Urstadt Biddle Properties Inc. (UBP) - 5.6%

39. Chesapeake Lodging Trust (CHSP) - 4.9%

40. Ares Comml. Real Estate Corp. (ACRE) - 8.1%

41. Brixmor Property Grp. Inc. (BRX) - 6.6%

42. Spirit Realty Capital Inc. (SRC) - 9.2%

43. Medical Properties Trust Inc. (MPW) - 7.3%

44. Gladstone Comml. Corp. (GOOD) - 8%

45. Brookfield Property Partners LP (BPY) - 6.4%

46. Chatham Lodging Trust (CLDT) - 6.4%

47. Ryman Hospitality Properties Inc. (RHP) - 4%

48. Armada Hoffler Properties Inc. (AHH) - 5.5%

49. Government Properties Income Trust (GOV) - 12.1%

50. Landmark Infra. Partners LP (LMRK) - 11%

51. RLJ Lodging Trust (RLJ) - 5.6%

52. GGP Inc. (GGP) - 4.3%

53. Community Healthcare Trust Inc. (CHCT) - 5.8%

54. Granite Real Estate Inv. Trust (GRP.U) - 5%

55. Pennsylvania Real Estate Inv. Trust (PEI) - 7.1%

56. Hersha Hospitality Trust (HT) - 5.3%

57. LaSalle Hotel Properties (LHO) - 5.1%

58. Brandywine Realty Trust (BDN) - 4.4%

59. Redwood Trust Inc. (RWT) - 7.3%

60. City Office REIT Inc. (CIO) - 7.6%

61. InfraREIT Inc. (HIFR) - 4.6%

62. Ashford Hospitality Trust Inc. (AHT) - 6.5%

63. MGM Growth Properties LLC (MGP) - 5.6%

64. Global Net Lease Inc. (GNL) - 10.8%

65. Northstar Realty Europe Corp. (NRE) - 4.2%

66. Independence Realty Trust Inc. (IRT) - 7.3%

67. Apple Hospitality REIT Inc. (APLE) - 6.3%

68. Xenia Hotels & Resorts Inc. (XHR) - 4.3%

69. New Senior Inv. Grp. Inc. (SNR) - 13.7%

70. Uniti Grp. Inc. (UNIT) - 10.8%

71. Outfront Media Inc. (OUT) - 7.2%

72. Franklin Street Properties Corp. (FSP) - 8.2%

28


Technology 1. International Business Machines Corp. (IBM) - 4.3%

2. QUALCOMM Inc. (QCOM) - 4.1%

3. Seagate Technology plc (STX) - 4.3%

Utilities 1. Southern Co. (SO) - 5.6%

2. AmeriGas Partners LP (APU) - 9%

3. Dominion Energy Inc./VA (D) - 5.4%

4. PPL Corp. (PPL) - 6.4%

5. SCANA Corp. (SCG) - 6.9%

6. CenterPoint Energy Inc. (CNP) - 4.4%

7. Brookfield Renewable Partners LP (BEP) - 6.4%

8. Duke Energy Corp. (DUK) - 4.9%

9. NorthWestern Corp. (NWE) - 4.2%

10. NRG Yield Inc. (NYLD.A) - 7.3%

11. Edison Intl. (EIX) - 4.1%

12. Entergy Corp. (ETR) - 4.7%

13. AES Corp./The (AES) - 4.2%

14. 8point3 Energy Partners LP (CAFD) - 9.1%

15. Pattern Energy Grp. Inc. (PEGI) - 9.3%

16. NRG Yield Inc. (NYLD) - 7.2%

17. FirstEnergy Corp. (FE) - 4.3%

29


List of Investments by Rank

Each of the securities with 4%+ yields in the Sure Dividend database are sorted by

rank below in order based on The 8 Rules of Dividend Investing (highest to lowest).

Dividend or distribution yield is included next to each security’s ticker symbol. 1. Buckeye Partners LP (BPL) - 13.7%

2. Vodafone Grp. plc (VOD) - 6.7%

3. Energy Transfer Partners LP (ETP) - 11.7%

4. Owens & Minor Inc. (OMI) - 6.4%

5. Altria Grp. Inc. (MO) - 5%

6. Omega Healthcare Investors Inc. (OHI) - 8.7%

7. NuStar Energy LP (NS) - 15.3%

8. R.R. Donnelley & Sons Co. (RRD) - 8.7%

9. TC PipeLines LP (TCP) - 10.3%

10. Enterprise Product Partners LP (EPD) - 5.9%

11. Enbridge Inc. (ENB) - 6.7%

12. BCE Inc. (BCE) - 5.6%

13. Holly Energy Partners LP (HEP) - 8.9%

14. Sunoco LP (SUN) - 12.6%

15. Vector Grp. Ltd (VGR) - 8.2%

16. Southern Co. (SO) - 5.6%

17. Bank of Nova Scotia/The (BNS) - 4.3%

18. Royal Dutch Shell plc (RDS.A) - 5.4%

19. Golar LNG Partners LP (GMLP) - 14.7%

20. AmeriGas Partners LP (APU) - 9%

21. Arbor Realty Trust Inc. (ABR) - 10.5%

22. Invesco Ltd (IVZ) - 4.3%

23. Welltower Inc. (WELL) - 6.1%

24. Kraft-Heinz Co./The (KHC) - 4.3%

25. Philip Morris Intl. Inc. (PM) - 5.6%

26. AT&T Inc. (T) - 6%

27. Dominion Energy Inc./VA (D) - 5.4%

28. PPL Corp. (PPL) - 6.4%

29. Royal Dutch Shell plc (RDS.B) - 5.2%

30. ONEOK Inc. (OKE) - 4.5%

31. General Mills Inc. (GIS) - 4.6%

32. Realty Income Corp. (O) - 4.9%

33. Canadian Imperial Bank of Commerce (CM) - 4.7%

34. Senior Housing Properties Trust (SNH) - 8.9%

35. W.P. Carey Inc. (WPC) - 6%

36. International Business Machines Corp. (IBM) - 4.3%

37. Universal Corp. (UVV) - 4.6%

38. Spectra Energy Partners LP (SEP) - 9.9%

39. CrossAmerica Partners LP (CAPL) - 12.2%

40. SCANA Corp. (SCG) - 6.9%

41. CenterPoint Energy Inc. (CNP) - 4.4%

42. National Health Investors Inc. (NHI) - 5.4%

43. Starwood Property Trust Inc. (STWD) - 8.7%

44. HCP Inc. (HCP) - 6.2%

45. Lexington Realty Trust (LXP) - 8.3%

46. Energy Transfer Equity LP (ETE) - 7%

47. Tanger Factory Outlet Centers Inc. (SKT) - 6.3%

48. GameStop Corp. (GME) - 10.5%

49. Brookfield Renewable Partners LP (BEP) - 6.4%

50. QUALCOMM Inc. (QCOM) - 4.1%

51. Duke Energy Corp. (DUK) - 4.9%

52. Macquarie Infra. Corp. (MIC) - 10%

53. Verizon Communications Inc. (VZ) - 4.9%

54. Meredith Corp. (MDP) - 4.5%

55. Patterson Companies Inc. (PDCO) - 4.8%

56. Taubman Centers Inc. (TCO) - 4.7%

57. LTC Properties Inc. (LTC) - 5.5%

58. Helmerich & Payne Inc. (HP) - 4.4%

59. Western Gas Partners LP (WES) - 7.2%

60. Iron Mountain Inc. (IRM) - 6.8%

61. Transmontaigne Partners LP (TLP) - 8.1%

62. Magellan Midstream Partners LP (MMP) - 5.3%

63. Simon Property Grp. Inc. (SPG) - 4.7%

64. Hospitality Properties Trust (HPT) - 7.4%

65. Mercury General Corp. (MCY) - 5.2%

66. PennantPark Floating Rate Capital Ltd (PFLT) - 8.2%

67. L Brands Inc. (LB) - 6.5%

68. Compass Diversified Holdings LLC (CODI) - 8.6%

69. Main Street Capital Corp. (MAIN) - 5.9%

70. National Retail Properties Inc. (NNN) - 4.6%

71. Cedar Fair LP (FUN) - 5.4%

72. Andeavor Logistics LP (ANDX) - 9.3%

73. NorthWestern Corp. (NWE) - 4.2%

74. EPR Properties (EPR) - 7%

75. Kimco Realty Corp. (KIM) - 6.9%

76. NRG Yield Inc. (NYLD.A) - 7.3%

77. Sabra Health Care REIT Inc. (SBRA) - 8.7%

78. Crown Castle Intl. Corp. (CCI) - 4.1%

79. Urstadt Biddle Properties Inc. (UBA) - 4.9%

80. Preferred Apartment Communities Inc. (APTS) - 6.9%

81. Westpac Banking Corp. (WBK) - 6.6%

82. Edison Intl. (EIX) - 4.1%

83. STAG Industrial Inc. (STAG) - 5.3%

84. Select Income REIT (SIR) - 9.5%

85. DDR Corp. (DDR) - 9.2%

86. NuStar GP Holdings LLC (NSH) - 9.4%

87. TOTAL S.A. (TOT) - 4.7%

88. Ventas, Inc. (VTR) - 5.8%

89. Hercules Capital Inc. (HTGC) - 10%

90. Western Gas Equity Partners LP (WGP) - 6.2%

91. New Residential Inv. Corp. (NRZ) - 11.1%

92. Apollo Comml. Real Estate Finance Inc. (ARI) - 9.8%

93. EnLink Midstream Partners LP (ENLK) - 8.9%

94. Macerich Co. (MAC) - 5.2%

95. Phillips 66 Partners LP (PSXP) - 5.4%

96. Westlake Chemical Partners LP (WLKP) - 6.3%

97. Universal Health Realty Income Trust (UHT) - 4.2%

98. Delek Logistics Partners LP (DKL) - 10.6%

30


99. Targa Resources Corp. (TRGP) - 7.5%

100. American Campus Communities Inc. (ACC) - 4.4%

101. CorEnergy Infra. Trust Inc. (CORR) - 8.3%

102. Entergy Corp. (ETR) - 4.7%

103. DCP Midstream LP (DCP) - 7.8%

104. PBF Logistics LP (PBFX) - 9.5%

105. VEREIT Inc. (VER) - 7.8%

106. One Liberty Properties Inc. (OLP) - 7%

107. HSBC Holdings plc (HSBC) - 5.2%

108. Kite Realty Grp. Trust (KRG) - 7.7%

109. Waddell & Reed Financial Inc. (WDR) - 5%

110. The GEO Grp. Inc. (GEO) - 7.5%

111. Nielsen Holdings plc (NLSN) - 4.6%

112. Life Storage Inc. (LSI) - 4.3%

113. AES Corp./The (AES) - 4.2%

114. Campbell Soup Co. (CPB) - 4.2%

115. Ares Capital Corp. (ARCC) - 9%

116. Hannon Armstrong Sust. Infra. Capital Inc. (HASI) - 7.3%

117. EnLink Midstream LLC (ENLC) - 6.2%

118. Urstadt Biddle Properties Inc. (UBP) - 5.6%

119. BGC Partners Inc. (BGCP) - 6.4%

120. Chesapeake Lodging Trust (CHSP) - 4.9%

121. 8point3 Energy Partners LP (CAFD) - 9.1%

122. Ares Comml. Real Estate Corp. (ACRE) - 8.1%

123. Höegh LNG Partners LP (HMLP) - 10%

124. Banco Latinoamericano de Comercio (BLX) - 5.7%

125. Ford Motor Co. (F) - 5%

126. Brixmor Property Grp. Inc. (BRX) - 6.6%

127. Sprague Resources LP (SRLP) - 11%

128. BP plc (BP) - 5.2%

129. AmTrust Financial Srvcs. Inc. (AFSI) - 4.8%

130. Pattern Energy Grp. Inc. (PEGI) - 9.3%

131. Spirit Realty Capital Inc. (SRC) - 9.2%

132. Medical Properties Trust Inc. (MPW) - 7.3%

133. Westwood Holdings Grp. Inc. (WHG) - 4.6%

134. Gladstone Comml. Corp. (GOOD) - 8%

135. Gladstone Inv. Corp. (GAIN) - 7%

136. Brookfield Property Partners LP (BPY) - 6.4%

137. Tallgrass Energy Partners LP (TEP) - 8.9%

138. Icahn Enterprises LP (IEP) - 9.9%

139. Chatham Lodging Trust (CLDT) - 6.4%

140. Ryman Hospitality Properties Inc. (RHP) - 4%

141. Armada Hoffler Properties Inc. (AHH) - 5.5%

142. SunCoke Energy Partners LP (SXCP) - 10.2%

143. MPLX LP (MPLX) - 6.8%

144. Government Properties Income Trust (GOV) - 12.1%

145. GasLog Partners LP (GLOP) - 8.8%

146. KNOT Offshore Partners LP (KNOP) - 9.9%

147. Landmark Infra. Partners LP (LMRK) - 11%

148. USD Partners LP (USDP) - 13.1%

149. Summit Midstream Partners LP (SMLP) - 14.2%

150. NRG Yield Inc. (NYLD) - 7.2%

151. Seagate Technology plc (STX) - 4.3%

152. National CineMedia Inc. (NCMI) - 9.4%

153. USA Compression Partners LP (USAC) - 11.5%

154. RLJ Lodging Trust (RLJ) - 5.6%

155. GGP Inc. (GGP) - 4.3%

156. Community Healthcare Trust Inc. (CHCT) - 5.8%

157. Green Plains Partners LP (GPP) - 10.9%

158. Ciner Resources LP (CINR) - 9%

159. Enviva Partners LP (EVA) - 8%

160. SemGroup Corp. (SEMG) - 7.6%

161. Granite Real Estate Inv. Trust (GRP.U) - 5%

162. Pennsylvania Real Estate Inv. Trust (PEI) - 7.1%

163. New Media Inv. Grp. Inc. (NEWM) - 8.4%

164. Hersha Hospitality Trust (HT) - 5.3%

165. LaSalle Hotel Properties (LHO) - 5.1%

166. Bowl America Inc. (BWL.A) - 4.5%

167. Brandywine Realty Trust (BDN) - 4.4%

168. Vermilion Energy Inc. (VET) - 6.1%

169. Redwood Trust Inc. (RWT) - 7.3%

170. City Office REIT Inc. (CIO) - 7.6%

171. InfraREIT Inc. (HIFR) - 4.6%

172. Ashford Hospitality Trust Inc. (AHT) - 6.5%

173. Golub Capital BDC Inc. (GBDC) - 6.9%

174. MGM Growth Properties LLC (MGP) - 5.6%

175. Cato Corp./The (CATO) - 5.5%

176. Goldman Sachs BDC Inc. (GSBD) - 8.7%

177. Global Net Lease Inc. (GNL) - 10.8%

178. Enable Midstream Partners LP (ENBL) - 7.6%

179. Northstar Realty Europe Corp. (NRE) - 4.2%

180. Independence Realty Trust Inc. (IRT) - 7.3%

181. Apple Hospitality REIT Inc. (APLE) - 6.3%

182. Artisan Partners Asset Mgmt. Inc. (APAM) - 7.3%

183. Fortress Transport. & Infra. Investors LLC (FTAI) - 7.5%

184. Xenia Hotels & Resorts Inc. (XHR) - 4.3%

185. FirstEnergy Corp. (FE) - 4.3%

186. Compass Minerals Intl. Inc. (CMP) - 4.2%

187. New Senior Inv. Grp. Inc. (SNR) - 13.7%

188. Cheniere Energy Partners LP (CQP) - 6.2%

189. Black Stone Minerals LP (BSM) - 7%

190. FS Inv. Corp. (FSIC) - 9.7%

191. Dynagas LNG Partners LP (DLNG) - 12.5%

192. Uniti Grp. Inc. (UNIT) - 10.8%

193. Barnes & Noble Inc. (BKS) - 9.8%

194. Kinder Morgan Inc. (KMI) - 4.8%

195. CenturyLink Inc. (CTL) - 12.3%

196. Consolidated Communications Hldgs. Inc. (CNSL) - 13.4%

197. Williams Companies Inc./The (WMB) - 5.2%

198. New York Community Bancorp Inc. (NYCB) - 5.7%

199. Outfront Media Inc. (OUT) - 7.2%

200. Navient Corp. (NAVI) - 4.3%

201. Costamare Inc. (CMRE) - 5.3%

202. Franklin Street Properties Corp. (FSP) - 8.2%

203. Gannett Co. Inc. (GCI) - 6.1%

204. IDT Corp. (IDT) - 5.6%

31


List of Past Recommendations & Ranking Criteria

The ranking criteria for the Top 10 list and requirements for inclusion in The Sure Retirement

Newsletter are derived from The 8 Rules of Dividend Investing and The Sure Analysis Research

Database.

The sell criteria are below:

• The security trades at 2/3 or less of historical average dividend or distribution yield

• Dividend or distribution is cut or eliminated (except in special situations)

Performance of securities currently in the Top 10 are shown below:

Name & Ticker Recommend Date Status Total Return4

AT&T Inc. (T) November 2016 Hold -0.4%

Buckeye Partners LP (BPL) November 2016 Hold -34.2%

Enterprise Products Part. (EPD) November 2016 Hold 29.5%

Omega Healthcare Inv. (OHI) November 2016 Hold 14.6%

Energy Transfer Partners (ETP)5 January 2017 Hold -5.7%

Sunoco LP (SUN) May 2017 Hold -3.1%

Owens & Minor Inc. (OMI) November 2017 Hold -14.0%

Invesco Ltd (IVZ) May 2018 Hold -2.7%

Altria Group Inc. (MO) May 2018 Hold 4.4%

R.R. Donnelly (RRD) June 2018 Hold N/A

Continue to the next page to see performance of past recommendations not currently in the Top

10, as well as sells and pending sells.

4 Total returns start with the market close price of the first trading day after the newsletter recommendation. Prior to

March 2018, this was the first trading day after the first Sunday of the month. As of March 2018, and later, this is

the first trading day after the second Sunday of the month. 5 Recommended as SXL which changed its ticker to ETP.

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32


Past recommendations (which are holds, not sells) not currently in Top 10:

Name & Ticker Recommend Date Total Return6 Current Yield Sell Yield

Urstadt Biddle Prop. (UBA) November 2016 12.5% 4.8% 3.6%

Magellan Midstream (MMP) November 2016 14.9% 5.3% 3.4%

Spectra Energy Part. (SEP) November 2016 -16.6% 9.9% 3.7%

Energy Transfer Equity (ETE) November 2016 39.4% 7.0% 4.0%

Holly Energy Partners (HEP) December 2016 0.9% 8.9% 4.7%

AmeriGas Partners LP (APU) January 2017 1.3% 9.0% 5.1%

Gladstone Inv. Corp. (GAIN) February 2017 47.4% 7.0% 6.7%

W.P. Carey Inc. (WPC) February 2017 14.3% 6.0% 4.0%

Kohl’s Corp. (KSS) May 2017 105.0% 3.2% 2.2%

Macy’s Inc. (M) May 2017 47.5% 3.8% 1.7%

Occidental Petroleum (OXY) June 2017 48.4% 3.6% 1.9%

Royal Dutch Shell (RDS.B) July 2017 40.9% 5.2% 3.8%

Vector Group Ltd (VGR) August 2017 4.1% 8.2% 5.1%

Target Corp. (TGT) November 2017 34.3% 3.2% 1.5%

ONEOK Inc. (OKE) January 2018 28.0% 4.5% 3.0%

Welltower Inc. (WELL) January 2018 -6.6% 6.0% 3.6%

Senior Housing Prop. (SNH) February 2018 12.4% 8.9% 5.0%

Sells & pending sells are below:

Name & Ticker Recommend Date Status Total Return

Waddell & Reed Fin. Inc. (WDR) November 2016 Sold 11/6/17 34.4%

Genesis Energy LP (GEL) November 2016 See notes7 -18.2%

TC PipeLines LP (TCP) December 2016 See notes8 45.9%

Suburban Propane Part. LP (SPH) July 2017 See notes 9 5.3%

6 Total returns start with the market close price of the first trading day after the newsletter recommendation. Prior to

March 2018, this was the first trading day after the first Sunday of the month. As of March 2018, and later, this is

the first trading day after the second Sunday of the month. 7 Sell at historical average yield of 6.5%, currently at 9.0% 8 Sell at historical average yield of 7.1% or upon acquisition offer, currently at 10.3% 9 Sell at historical average yield of 8.7%, currently at 10.2%

33


Portfolio Building Guide

The process of building a high-yield dividend portfolio is straightforward: Each month invest

in the top-ranked security in which you own the smallest dollar amount out of the Top 10.

Over time, you will build a well-diversified portfolio of quality businesses purchased when they

yield 4% or more. If your portfolio has 25% or more allocated to one sector, buy the highest

ranked stock not in that sector. Alternatively, the Top 10 list is also useful as an idea generation

tool for those with a different portfolio allocation plan.

Examples Portfolio 1 Portfolio 2

Ticker Name Amount Ticker Name Amount

BPL Buckeye Partners $ 1,002 BPL Buckeye Partners $ 4,374

OMI Owens & Minor $ - OMI Owens & Minor $ 4,878

SUN Sunoco LP $ - SUN Sunoco LP $ 5,374

IVZ Invesco $ - IVZ Invesco $ 4,353

T AT&T $ - T AT&T $ 7,312

ETP Energy Transfer Partners $ - ETP Energy Transfer Partners $ 2,799

MO Altria Group $ - MO Altria Group $ 2,952

OHI Omega Healthcare $ - OHI Omega Healthcare $ 6,660

RRD R.R. Donnelley & Sons $ - RRD R.R. Donnelley & Sons $ 2,367 EPD Enterprise Products $ - EPD Enterprise Products $ 2,818

- If you had portfolio 1, you would buy OMI, the top ranked security you own least.

- If you had portfolio 2, you would buy RRD, the top ranked security you own least.

If you have an existing portfolio or a large lump sum to invest, switch over to the Sure

Retirement strategy over 20 months. Each month take 1/20 of your initial portfolio value and

buy the top-ranked security you own the least out of the Top 10 (if that sector makes up less than

25% of your portfolio). When you sell a security, use the proceeds to purchase the top-ranked

security you own the least.

This simple investing process will build a diversified portfolio of high-quality dividend or

distribution securities over a period of less than 2 years. There’s nothing magical about 20

months. A period of 15 months or 30 months will yield similar results.

If your portfolio grows too large to manage comfortably (for example, you are not comfortable

holding 40+ securities – which would happen after around 4 years of the Sure Dividend system),

you will need to sell holdings. I recommend eliminating positions that have the lowest yields.

You can combine recommendations from The Sure Retirement, The Sure Dividend, and The

Sure Dividend International Newsletters by targeting a specific yield for your overall portfolio.

When you need your portfolio yield to increase, invest from The Sure Retirement Newsletter. If

less yield is required (and growth is preferred), invest from The Sure Dividend Newsletter. The

Sure Dividend International Newsletter can be used for international diversification.

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34


Tax Guide There are 4 broad types of investment vehicles covered in The Sure Retirement Newsletter:

1. Corporations

2. Master Limited Partnerships (MLPs)

3. Real Estate Investment Trusts (REITs)

4. Business Development Companies (BDCs)

The organization form is important for tax purposes because it determines how efficiently a

company can return money to unit or shareholders. An example is below.

Imagine a company makes $10, pre-tax, and distributes 100% to investors. The image below

shows how much of the $10 would go to investors using standard assumptions for the three

investment vehicles:

Note: Tax treatment for BDCs and REITs is similar. BDCs have been omitted from the

images below because of this.

• $5.92 in after-tax income from Corporation

• $6.81 in after-tax income from REIT

• $7.41 in after-tax income from MLP

The image below gives an overview of the different organizational forms:

35


Corporations Corporations are taxed on income at the corporate level. They then pay out this after-tax

income to shareholders. Shareholders are then taxed again at the individual level.

Note: The United States corporate tax rate (including the state and federal levels) is 26%

after the Tax Cuts and Jobs Act. The global average is 23%, for comparison.

Corporations issue a 1099 to track dividend payments to shareholders. They are the simplest

and most common type of investment. They are also the least tax-advantaged.

Given the choice, corporations should be held in a retirement account to minimize taxes. Of

course, owning them in a taxable account is fine, one will just be paying taxes on dividends

received. Capital gains taxes are only triggered when a common stock is sold, making it tax

advantageous to buy and hold.

Capital gains taxes are divided into two types: short-term and long-term. Short-term capital

gains tax applies to investments held for less than a year. The short-term capital gains rate is

your ordinary income tax rate. It ranges between 10% and 37% depending on your income

bracket.

Long-term capital gains apply to most types of investments (including Corporations, REITs,

and MLPs) held longer than 1 year. The maximum long-term capital gains tax rate is 20%.

The minimum is 0%. Most investors will fall into the 15% long-term capital gains tax

bracket.

Dividend taxes are also divided into two types: ordinary and qualified. Most dividends paid

from blue-chip dividend stocks are ‘qualified.’ The requirements for a dividend to be

classified as ‘qualified’ are below:

• The company must be a U.S. corporation, or a foreign corporation that readily trades

on major U.S. exchanges, or be incorporated in a U.S. territory.

• The investor must have held the stock for 60+ days before the ex-dividend date.

Qualified dividends are taxed at the same rate as long-term capital gains; between 0% and

20% (though most investors will be in the 15% bracket). Ordinary dividends are dividends

36


that do not meet the criteria to be ‘qualified.’ Ordinary dividends are taxed at the ordinary

income tax rate.

Master Limited Partnerships (MLPs) MLPs are the most tax efficient vehicle for returning money to investors. They avoid the

double taxation issues of Corporations. MLPs are not taxed at the organization level.

Unfortunately, MLPs are also the most complicated.

Typically, somewhere around 80% to 90% of MLP distributions are considered a ‘return

of capital’ because of depreciation. You don’t pay taxes immediately on ‘return of

capital’ distributions.

Returns of capital reduce your cost basis in the MLP. You are not taxed until you sell the

units.

For example, imagine you buy 10 units of an MLP at $100 a unit for a total investment of

$1,000. Now imagine you hold for 5 years.

The MLP unit price has increased to $120. Your investment is now worth $1,200. It also paid out $37.50 per unit in distributions over this time, with 80% of that being a

return of capital ($37.50 x 80% = $30 return of capital).

The 20% of distributions that were not returns of capital would be taxed at your ordinary income tax rate, which is up to 37%. These taxes would be due the year they are accrued.

Your cost basis would be $700 (initial investment amount of $1,000 less return of capital

of $30 per unit or $300 total). The amount of long-term capital gains tax you owe

(assuming you are in the 20% tax bracket) is $100.

Math Behind Example: Sale price of $1,200 less cost basis of $700 = $500 in capital

gains. $500 in capital gains x 20% tax bracket = $100.

As a caveat, if the cost basis ever falls below 0 (which will only happen after holding for

around a decade or more), you will owe long-term capital gains tax on the amount the

cost basis is below 0 every year.

Return of capital and other issues discussed above do not matter when MLPs are held in a

retirement account.

There is a different issue with holding MLPs in a retirement account, however. This

includes 401(k), IRA, and Roth IRA accounts, among others.

When retirement plans conduct or invest in a business activity, they must file separate tax

forms to report Unrelated Business Income (UBI) and may owe Unrelated Business

Taxable Income (UBTI). UBTI tax brackets go up to 37% (the top personal rate).

MLPs issue K-1 forms for tax reporting. K-1s report business income, expense, and loss

to owners. Therefore, MLPs held in retirement accounts may still qualify for taxes.

37


If UBI for all holdings in your retirement account is over $1,000, you must have your

retirement account provider (typically, your brokerage) file Form 990-T. You will want to file form 990-T as well if you have a UBI loss to get a loss carryforward for

subsequent tax years. Failure to file form 990-T and pay UBIT can lead to severe

penalties. Fortunately, UBIs are often negative. It is a fairly rare occurrence to owe

taxes on UBI.

The subject of MLP taxation can be complicated and confusing. Hiring a tax

professional to aid in preparing taxes is a viable option for dealing with the complexity.

The bottom line is this: MLPs are tax-advantaged vehicles that are suited for investors

looking for current income. It is fine to hold them in either taxable or non-taxable

(retirement) accounts. Since retirement accounts are already tax-deferred, holding MLPs

in taxable accounts allows you to ‘get credit’ for the full effects of their unique structure.

Real Estate Investment Trusts (REITs) Like MLPs, REITs avoid double taxation. REITs are not taxed at the organization level.

REITs are in between MLPs and Corporations in terms of both complexity and tax-

advantages. REITs are required to pay out 90%+ of their income.

REITs are organized as trusts. As a result, ‘shareholders’ are actually unit holders.

REITs issue 1099 forms (just like corporations) instead of K-1 forms (like MLPs do). Unit holders receive distributions, not dividends (just like MLPs). REIT distributions fall

into three categories:

• Ordinary income

• Return of capital

• Capital gains

Ordinary income is taxed at your ordinary income tax rate; up to 37%. Return of capital

reduces your cost basis (just as it does with MLPs). Capital gains are taxed at either

short-term or long-term capital gains rates.

The percentage of distributions from these three sources varies by REIT. In general,

ordinary income tends to be the majority of the distribution. Expect around 70% of

distributions as ordinary income, 15% as a return of capital, and 15% as capital gains.

REITs are best suited for retirement accounts because the majority of their payments are

taxed as ordinary income. Retirement accounts remove this negative and make REITs

very tax advantageous.

This doesn’t mean you should never own a REIT in a taxable account. A good

investment is a good investment, regardless of tax issues. If you have the choice, REITs

should definitely be placed in a retirement account such as an IRA or 401k.

38


Business Development Companies (BDCs) Much like REITs, business development companies must pay out 90%+ of their income

as distributions. Additionally, business development companies must derive 90% of their gross income from interest, dividends, or capital gains on securities.

BDCs pay their distributions as a mix of:

• Ordinary income & non-qualified dividends

• Qualified dividends

• Return of capital

• Capital gains

Just as with MLPs, returns of capital reduce your tax basis. Qualified dividends and

long-term capital gains are taxed at lower rates, while ordinary income and non-qualified dividends are taxed at your personal income tax bracket rate.

Unfortunately, 70% to 80% of BDC income is typically derived from ordinary income.

Because of this, they make excellent vehicles for tax-advantaged retirement accounts.

Please email us at [email protected] with any questions you have on taxes

regarding retirement accounts, MLPs, and REITs. Frequently asked questions will be

added to this tax guide.

As a newsletter provider, we can’t provide specific personal investment advice, only

general information.

39


Glossary of Common Terms & Acronyms

Adjusted Funds From Operations (AFFO): A term used to describe Funds From

Operations (FFO), plus non-recurring items that do not impact the long-term

fundamentals of the business. See FFO in this glossary for more.

Cash Available for Distribution (CAD): This term is also referred to as funds available

for distribution (FAD). It is the cash available to be distributed to unitholders. It is most

commonly seen with REITs. CAD is calculated by subtracting recurring capital

expenditures from funds from operations.

Distributable Cash Flow (DCF): A non-GAAP (Generally Accepted Accounting

Principles) financial metric frequently utilized by Master Limited Partnerships as an

alternative to earnings-per-share. Expresses cash available for unitholder distributions,

after payments to the General Partner. Calculated by adding non-cash items, such as depreciation and one-time expenses, to net income. Viewed as a better gauge of financial

health than earnings-per-share, as MLPs operate asset-heavy business models with

significant depreciation expenses.

Dividend Yield: The annual dividend returns from an investment, expressed as a

percentage. The dividend yield is calculated from the annual dividend per share, divided

by the stock price per share. MLPs and REITs pay distributions, not dividends.

Distribution yield is used for them instead of dividend yield, though some companies

(notably REITs) call it a dividend for ease of understanding by the public.

Dividend Payout Ratio: The percentage of earnings paid to shareholders as a dividend.

The payout ratio is calculated from the annual dividend per share, divided by annual

earnings-per-share. For MLPs and REITs, this is typically expressed as the distribution coverage ratio.

EBITDA: Earnings before interest, taxes, depreciation, and amortization. Used by

companies with high levels of depreciation and interest costs, such as MLPs, to indicate the financial health of a business. A similar metric to operating cash flow. Frequently

used as part of leverage ratios such as debt-to-EBITDA.

Funds From Operations (FFO): A non-GAAP financial metric frequently utilized by Real Estate Investment Trusts, as an alternative to earnings-per-share. FFO is calculated

by adding depreciation and amortization expenses to net income, minus any gains on

asset sales. REITs view FFO as a more accurate gauge of financial health, since

earnings-per-share are heavily impacted by depreciation and amortization expenses.

GAAP: Generally accepted accounting principles. These are legally required,

standardized accounting rules and procedures used when preparing financial statements.

If you read a term in The Sure Retirement Newsletter not on this list with which you are unfamiliar, please email [email protected]. We will explain the term and add it

to the glossary in next month’s edition.

june 2018 edition - suredividend.com · buckeye partners is a midstream energy master limited...

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