the fiscal cliff and taxmageddon why dividend stocks are still your … · 2015-05-06 · why...

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Issue #005 / September 2012

The Fiscal Cliff and Taxmageddon Why Dividend Stocks Are Still Your Best BetAugust was a great month for dividend lovers.

The companies of the S&P 500 paid out a total of $34 billion of dividends in the month of August, an all-time record.

2013 is on track to be even bigger. According to Barron’s, dividend payouts are scheduled to increase by 5.8% in 2013.

Even more noteworthy than the huge dollar amount is the fact that the payout ratio of dividends as a percentage of corporate profits is quite low by historical standards. The payout ratio was roughly 33% in August, far below the historical norm of 54%.

Money in the Bank! 27.8% and 16.2% Profits on United Online and Yara International

It took a few days for Yara International to hit our $49 target because of its thin trading volume, but it looks like everybody’s order should have been filled at $49.

That means you booked two double-digit profits in August, up to 27.8% on United Online and 16.2% on Yara International.

We would like to buy both stocks back if they go on sale. We will let you know immediately when it is time to do so. For now, enjoy your profits!

In This Issue

The Fiscal Cliff and Taxmageddon: Why Dividend Stocks Are Still Your Best Bet

Build America Bonds: Better Than Muni Bonds and 300% Better Than 10-Year Treasuries

Protect Your Gains: Raise Your Protective Stops

Portfolio Review

Questions and Answers

2Yield Shark / Septmeber 2012

Dividends are not guaranteed, but that low dividend payout ratio makes it very likely that a number of our Yield Shark holdings will increase their dividends next year.

What is guaranteed, unless Congress takes action before the end of the year, is that the tax rate on dividends will increase from the current 15% rate.

A Brief History of Taxes

The modern era of income taxes kicked off in 1913, the year that the 16th Amendment to the Constitution gave Congress the legal authority to tax the income of both individuals and businesses.

Article XVI: The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

The tax code has been modified thousands of times since then, and the tax on dividends has been all over the place. Dividends are currently taxed at a 15% rate, the lowest level in 60 years. However, dividends were taxed at even lower rates in the past.

The lowest rate was when dividend income was “exempt” from taxes, effectively a 0% tax rate, from 1913 to 1935 and again from 1940 to 1953.

The highest that dividends have ever been taxed was in 1936 to 1939, when they were taxed as ordinary income at up to a 79% rate.

Dividends were then taxed at a 28% to 50% rate from 1985 to 2002, until a series of temporary tax cuts under the Bush administration took them to the current 15% rate.

Dividend Taxations

Year Top Tax Year Top Tax Rate

1913 Exempt 1962 $50 Exempt

















Dividend Taxations

Year Top Tax Year Top Tax Rate




1932 Exempt 1981 $200-$400 Exempt (1)

1933 Exempt 1982 $200-$400 Exempt (1)

1934 Exempt 1983 (1)

1935 Exempt 1984 (1)

1936 Fully Taxable 1985 Fully Taxable (1)

1937 Fully Taxable 1986 Fully Taxable (1)

1938 Fully Taxable 1987 Fully Taxable

1939 Fully Taxable 1988 Fully Taxable

1940 Exempt 1989 Fully Taxable














1954 $50 Exempt 2003 15%

1955 $50 Exempt 2004 15%

1956 $50 Exempt 2005 15%

1957 $50 Exempt 2006 15%

1958 $50 Exempt 2007 15%

1959 $50 Exempt 2008 15%

1960 $50 Exempt 2009 15%

1961 $50 Exempt 2010 15%

2011 15%Note (1): $750 to $1500 exempt if reinvested in utilities Source: Tax Foundation (they sourced Treasury Dept. and Commerce Clearing House)


However, the tax rate on dividends is set to increase on January 1, 2013.

The Yield Shark team is very aware of this potential tax increase, and we are intently focused on how this could affect our recommended holdings.

If politicians can find a way to tax sunshine, rest assured, they’ll do it.

On January 1, the Bush tax cuts that reduced the tax rate on dividends will expire.

The top tax rate on dividends, currently at 15%, will increase to as much as 43.4% in 2013, because dividends will then be taxed as ordinary income, as well as carry a 3.8% Obamacare surcharge.

This tax increase is part of President Obama’s plan to get the rich to pay their “fair share” in taxes.

By the way, on top of the tax increase, $100 billion in automatic spending cuts will also kick in on January 1. It is this combination of a tax increase and spending cuts that has Wall Street so rightly worried.

Absent some budget compromise, this double whammy will be a repressive, economy-killing move.

Fear, however, seldom leads to smart investment decisions, and in this case we believe that our politicians will not let us fall over the edge of the fiscal cliff.

Deal or No Deal?

Politics means unpredictability, but I believe an eleventh-hour compromise on the fiscal cliff will be reached. Politicians may be short-sighted, but they aren’t suicidal, so I see two possible outcomes:

Outcome#1: Neither party wants to be the party that killed the economy, so I suspect Congress will agree to kick the can down the road again by extending the debt ceiling and pushing the deadline for a budget deal to 2013 or 2014. Tax increases will be delayed, and so will spending cuts.

Outcome#2: Lawmakers reach some sort of compromise. I believe it is very possible that both sides will give a little ground. The Democrats agree to continue preferential tax treatment of dividends, albeit at a slightly higher rate than 15%, and the Republicans agree to a higher rate on the highest earners.

In fact, the Democrats have already proposed a maximum dividend tax of 20% (23.8% if you include the Obamacare tax) instead of the 43.4% they originally wanted, so there has already been some substantial movement.

The Democrats know that an increase of the marginal tax rate on dividends from 15% to 43.4% would reduce the after-tax returns on dividend income by 33.4%.

The Grandparent Tax

If Congress allows the dividend tax to rise dramatically, the people it will hurt the most will be America’s retirees, who live off their investment income.


Despite what politicians say, higher taxes on dividends is not about getting the wealthy to pay their “fair share.” It is about higher taxes for American grandfathers and grandmothers.

According to the most recent data I could find, people aged 65 and older account for 42% of the dividend income reported in tax filings.

And this move to increase the dividend tax comes precisely at a time when the traditional sources of retirement income – CDs, T-bills, bonds, and savings accounts – are paying darn close to zero.

Dividends are one of the few bastions of income left for retirees.

Example: Take a retired couple with $500,000 in dividend-paying stocks yielding an average of 4%, or $20,000. In 2012, they would have to give back $3,600 in dividend income taxes, netting them $16,400.

Fast-forward to 2013, and that same retired couple moves from a 15% bracket to 28%. The new tax bill on that $20,000 of dividend income jumps from $3,000 to $5,600, leaving them with a net of only $14,400.

Those grandfathers and grandmothers, by the way, vote in large numbers – they number roughly 40% of all voters. Seniors also take their voting rights seriously and have a very high voting participation rate – generally close to 70% in presidential election years.

That is why politicians go out of their way to court the senior vote, and you can be sure that AARP is bending every politician’s ear. AARP and other lobbying groups for retirees are making it clear to politicians that significantly raising taxes on dividends may cost them their Washington DC jobs.

I just don’t see the tax rate on dividends going up substantially.


Please note that I’m not forecasting that there won’t be any tax increase. I do expect the tax on dividends to increase, just not by a dangerous amount.

The stock market is a forward-pricing mechanism, and the invisible hand of capitalism has already priced in the possibility of a tax increase.

In fact, because the Obamacare surtax is already law, every single investor knows that the tax rate on dividends will increase from 15% to at least 18.8% on January 1, 2013.

A higher tax rate on dividends could take some luster off dividend-paying stocks; but once the tax uncertainty is removed and Wall Street realizes dividend taxes aren’t moving sharply higher, you could see an Oklahoma-style land rush for the same dividend stocks that everybody is so worried about today.

Lastly, what’s the alternative to dividends?

A 10-year Treasury bond at 1.7%?

A one-year CD at 0.7%?

Remember, the tax rate on interest income is the same as for ordinary income, so those interest-bearing vehicles are already taxed in the worst way possible.

The relative appeal of dividend stocks compared to bonds and CDs may diminish a little; but in absolute terms, you and I as individual investors are still way ahead with our dividend payers.

Hedging Against Disaster Portfolio Insurance and Protective Stops

As most of us have painfully learned, things don’t always work out the way we plan; so despite my optimism about the future of dividend taxation, we do want to install some safeguards.

After all, I could be wrong.

There are really three practical options to protect your portfolio from falling off the fiscal cliff.

Safeguard #1: You could sell some of your stocks and increase your cash cushion. Yield Shark has already done a little of that by taking gains on United Online and Yara International, but selling even more is an option.

Safeguard #2: You could protect yourself in the short term by placing options bets on a broad decline in dividend-paying shares, but that strategy is expensive.

For example, say you bought January 2013 put options with a strike price of $57 on the SPDR S&P Dividend ETF (NYSE:SDY).You would have to pay roughly $2 per contract, that is, 3.5% of the $57. In other words, you’d have to spend about $3,500 for every $100,000 of portfolio value that you wanted to protect.

For most investors, giving up 3.5% of their capital is just too high a premium to pay for only four months’ worth of insurance.


Safeguard #3: The most practical and ultimately the most effective option would be to set a series of protective stop-loss orders on your holdings. The more worried you are, the closer you should place a protective stop to the current stock price. It is the practice of Yield Shark to recommend protective stops on every one of its recommendations, and you will see in the Portfolio Review section that my research team has recommended moving up the protective stops.

We are fortunate that every Yield Shark position is in the green, so the use of protective stops to lock in those gains makes more sense than buying expensive put options.

We’re serious about using protective stops, and we want you to take them seriously, too. Don’t just make a mental note of them and go on vacation. Those stops are there to (a) prevent small losses from turning into big losses and (b) prevent your open gains from disappearing, so please put in the stops as instructed.

Finally, my research team has come up with another exciting option whose yield is roughly triple that of a 10-year Treasury bond – one that won’t be affected by an increase in the tax rate on dividends.

Now let’s hear from the research team.

. . . . .Build America Bonds: Better Than Muni Bonds and 300% Better Than 10-Year Treasuries

As John outlined, the tax rate on dividends may increase in 2012, and while protective stops are an excellent risk-management tool, another effective strategy is to diversify some of your portfolio into vehicles whose after-tax income won’t be affected by a tax increase on dividends.

This month, we want to introduce you to an investment that will be unaffected by what may happen to dividend taxes.

The reason is simple: the tax rate on interest income will be completely unaffected by any dividend tax increase, because interest income is taxable at the recipient’s personal tax rate. So, because the tax on interest-bearing investments won’t increase, after-tax income would be higher than that from dividend-paying stocks.

Municipal bonds, by the way, are also under attack. The Obama budget seeks to cap the tax exemption on tax-exempt municipal bonds for top-income earners. Municipal bond income is currently tax exempt for people in the top (35%) tax bracket, but Obama has proposed limiting the tax exemption to taxpayers in the 28% tax bracket or lower.

That means interest on muni bonds for people with income above $83,600 for single filers and $139,350 for households would be fully taxable as ordinary income, no matter whether the interest was from tax-exempt municipalities or not.

That makes this month’s recommended investment even more attractive, compared to dividend-paying stocks and tax-free municipal bonds.


Plus, this investment also throws off roughly three times the income of a 10-year Treasury bond.

We’re talking about a very unique group of government bonds called Build America Bonds, or BABs, that yield upwards of 5%.

Build America Bonds: One of Obama’s Best Ideas

All of us remember the stock market pain the 2008 financial crisis caused, but its most crushing effect was the liquidity crisis. Credit for individuals and businesses, as well as states, and municipalities, was drier than the Sahara Desert.

The liquidity crisis was so bad that some municipalities were in danger of running out of cash.

At the same time, the federal government wanted to stimulate the economy by creating employment at the local level.

Thus, the Build America Bonds program was created out of the $800 billion stimulus package, called the American Recovery and Reinvestment Act of 2009, and has since proven to be one of the most successful programs to come out of the Obama administration.

In simple terms, the BAB program subsidized (lowered) the cost of borrowing for municipalities and provided financing for capital expenditures such as highways and airports.

BAB issuers received a subsidy from the federal government – initially set at 35% – that permitted municipalities to issue bonds that paid interest rates competitive with the rates paid by corporations.

For example, in 2009 California sold $2.5 billion of BABs that offered an interest rate of 7.4% to investors. The state, courtesy of the tax break, had to pay only 4.8% of that interest, with the federal government picking up the tab for the rest.

The response was very strong: state and local governments issued more than 2,000 of the bonds, which financed more than $180 billion in capital infrastructure investments.


• The city of Stevens Point, Wisconsin, was first out of the gate, selling $3,650,000 worth.

• The New Jersey Turnpike Authority sold $1.32 billion, which was used to finance additions to the mass transit system.

• California issued $2.5 billion of bonds to rebuild the east span of the San Francisco-Oakland Bay Bridge.

Top Issuers of Build America Bonds

Rank Issuer Volume Market Share %

# of Issues

1 California (State) $13,413.0M 8.2 6

2 New York City $3,528.1M 2.2 5

3 Texas Transportation Commission $3,523.9M 2.2 3

4 New York City Municipal Water Finance Authority $3,458.3M 2.1 6

5 Bay Area Toll Authority; Calif. $3,275.0M 2 3

6 Illinois (State) $3,256.0M 2 6

7 Metropolitan Transportation Authority, N.Y. $3,039.8M 1.9 6

8 New York City Transitional Finance Authority $2,915.1M 1.8 6

9 University of California $2,637.6M 1.6 5

10 Los Angeles Unified School District, Calif. $2,620.4M 1.6 2


The BAB program ended in 2010, and no new bonds have been issued since. However, that does not affect outstanding issues. The Obama administration has sought to continue the program, but Republicans in Congress have opposed it because of the increase it would mean to our national debt.

From the investor’s viewpoint, BABs are extremely attractive, because their yield is much higher than that of corresponding Treasury bonds.

Sounds Perfect! Not So Fast: There Are Risks.

There is no such thing as a perfect investment, and Build America Bonds are no exception.

Even though the interest is subsidized by the federal government, BABs are debt instruments issued by states and municipalities and are not guaranteed by the full faith and credit of the federal government.

BABs are instead guaranteed by the governmental body that issued them. Most BABs carry top ratings of AA and AAA, and many are general-obligation bonds, which are backed by the full taxing power of states and municipalities. Others are backed by revenues from essential services, such as water and sewer projects.

Make no mistake: BABs are not riskless.

However, if you are going to buy bonds, BABs offer what we consider to be the very best risk-adjusted reward of any bond you can find.

Top Pick: PowerShares Build America Bond ETF

You can substantially mitigate that risk by purchasing BABs via an ETF, diversifying your risk over dozens of different issues. Our top pick is the PowerShares Build America Bond ETF, symbol BAB, which tracks the Bank of America/Merrill Lynch Build America Bond Index.

State Allocation (%)

California 23.39

Illinois 9.4

New York 9.25

Texas 7.68

Florida 7.13

New Jersey 5.64

Nevada 5.36

Colorado 4.79

Washington 4.23

Pennsylvania 2.93

Roughly half of the bonds in the fund mature in 25 years or more, while another 43% have at least 15 years to maturity, giving the fund an average maturity of 24 years.


Top 10 Holdings

Name Coupon Maturity S&P/Moody’s Rating

Weight (%)

Los Angeles CA Unified School District 6.758 7/1/2034 AA-/Aa2 2.00

Chicago III O’Hare International Airport 6.395 1/1/2040 A-/A1 1.98

Florida State Government Utility Authority 6.548 10/1/2040 NR/A2 1.64

California State Muni 6.509 4/1/2039 A-/A1 1.56

New York NY 5.968 3/1/2036 AA-/Aa2 1.55

Municipal Electric Authority Georgia 7.055 4/1/2057 A-/Baa2 1.54

New Jersey State Transit Trust Fund 6.561 12/15/2040 A+/A1 1.52

Chicago III O’Hare International Airport 6.845 1/1/2038 A-/A1 1.51

Denver Colorado City & County Airport 6.414 11/15/2039 A+/A1 1.44

Pennsylvania State Turnpike Preferred Traveler 5.511 12/1/2045 A+/Aa3 1.39

That long maturity means there is significant interest-rate risk to this fund, but we expect the Fed to keep interest rates low for the foreseeable future.

A distant maturity date doesn’t mean you can buy this fund, tuck it away, and forget about it. It does mean that the interest-rate risk is identifiable, manageable, and, in our view, very worth taking for the next one to three years.

Plus, those longer-maturity Build America Bonds translate into a very handsome income stream, currently around the 4.5% range, which is approaching 300% more income than you would get from 10-year Treasury bonds.

Like the Aberdeen Asia-Pacific Income Fund that we previously recommended, BAB pays out its interest earnings each and every month.

Date Dividend Paid

Aug 15th, 2012 $0.125 Dividend

Jul 13th, 2012 $0.12 Dividend

Jun 15th, 2012 $0.119 Dividend

May 15th, 2012 $0.123 Dividend

Apr 13th, 2012 $0.125 Dividend

Mar 15th, 2012 $0.125 Dividend

Feb 15th, 2012 $0.124 Dividend

Jan 13th, 2012 $0.123 Dividend

Dec 15th, 2011 $0.122 Dividend

Nov 15th, 2011 $0.123 Dividend

Oct 14th, 2011 $0.12 Dividend


Date Dividend Paid

Sep 15th, 2011 $0.126 Dividend





Apr 15th, 2011 $0.127 Dividend

Mar 15th, 2011 $0.125 Dividend

Feb 15th, 2011 $0.122 Dividend

Jan 14th, 2011 $0.126 Dividend

Dec 15th, 2010 $0.125 Dividend

Nov 15th, 2010 $0.115 Dividend

Oct 15th, 2010 $0.116 Dividend

Sep 15th, 2010 $0.116 Dividend





As the above table shows, BAB pays out a pretty steady amount each month, regardless of what happens to the bond market.

It helps that BAB has a rock-bottom expense ratio of only 28 basis points.

BAB beats long-term Treasury bonds and long-term CDs, hands down. And, as we mentioned at the top, your earnings from this ETF will be unaffected by any increase of the tax rate on dividends.

Here’s what to do:

BUY 150 shares of PowerShares Build America Bond ETF, symbol BAB, at the market.

Also, place a protective stop to sell ALL your shares at 28.50. This order is good until canceled.

That protective stop of $28.50 is about 5.5% below the current price.

. . . . .


Protect Your Gains: Raise Your Protective Stops Plus, Portfolio Review

In the opening section, John advised that this is the time to add safeguards against a potential increase in the tax rate on dividends, and one of the most effective risk-management tools is protective stops.

Below are five moves we want you to make with your portfolio.

1. Raise the protective stop on Aberdeen Asia-Pacific Income Fund to $7.20.

2. Raise the protective stop on Female Health Company to $5.50.

3. Raise the protective stop on Linn Energy to $35.

4. Raise the protective stop on Philip Morris International to $82.

5. Raise the protective stop on Plum Creek Timber to $37.

We’re serious about these protective stops, and we want you to take them seriously. These stops are there to (a) prevent small losses from turning into big losses and (b) prevent your open gains from disappearing, so please put in the stops as instructed.

. . . . .Portfolio Review

Aberdeen Asia-Pacific Income Fund (FAX)

The fund released the monthly update of its portfolio composition. The only significant changes in the last month were a slight increase, from 44.6% to 45.0%, in the allocation to Australian-dollar-denominated bonds and another slight increase, from 38.6% to 39.1%, for US-dollar-denominated bonds.


As of July 31, 2012, the portfolio was invested as follows:Currency Exposure % Geographic Exposure %

Australia 45.0 42.3

New Zealand 0.2 0.2

Canada - 0.1

United States* 39.1 1.5

United Kingdom - 0.3

Norway - 0.6

Germany - 1.1

Netherlands - 0.6

South Korea 2.3 10.8

Philippines 0.7 6.8

Malaysia 2.0 6.4

Singapore 1.1 3.2

Thailand 1.1 4.6

Hong Kong 0.3 5.1

Indonesia 2.2 6.6

China 4.9 5.2

India 1.1 4.4

Sri Lanka - 0.2 * Of which 35.3% invested in US$ denominated bonds issued by foreign issuers.

Keep in mind, even though 39% of the fund is US-dollar-denominated, those are not American bonds. They are foreign bonds denominated in US dollars.

The Aberdeen strategy is working, as the below table shows. While the fund is up 4.3% so far this year, take a look at the very impressive long-term, annual-return numbers.

Period NAV Total Return %

Cumulative Annualized

Since Inception (April 1986) 1,008.2 9.6

10-years 216.6 12.2

5-years 61.9 10.1

3-years 51.7 14.9

1-year 4.3

FAX paid out a 3.5-cent dividend on August 29.


New subscribers: BUY 600 shares of Aberdeen Asia-Pacific Income Fund, symbol FAX, at $7.50 or better. Place a protective stop at $6.85.

Annaly Capital Management (NLY)

Annaly issued $400 million of preferred stock at the beginning of September, with a coupon rate of 7.5%.

Issuer Annaly Capital Management, Inc.

Issue Series D Cumulative Redeemable Preferred Stock

Coupon 7.50%

Ticker NLYPrD ( expected)

Size $400,000,000 (4MM shares)

Optional Redemption September 2017

Use of Proceeds To purchase mortage-backed securties

Special Redemption Upon change of control (at $25)

Conversion Upon change of control

Annaly management believes, of course, that they can earn a lot more than the 7.5% they will be paying out. Annaly has a long track record of producing impressive profits on its invested capital and should continue to do so until the Fed alters its monetary policy.

Assuming that Annaly management continues to deliver, this preferred stock issuance should result in a modest boost to earnings.

Last month, we recommended moving up the protective stop to $17, which is roughly 3% below the current price. That is a pretty tight stop but one that is appropriate, given the high leverage that the company uses to generate its large profits and juicy dividend.

New subscribers: Do not buy.

Female Health Company (FHCO): The Bill and Melinda Gates Foundation has declared that contraceptive availability in developing countries is one of its new top priorities. How big a priority?

Melinda Gates, speaking at the London Summit on Family Planning, said her foundation will devote $1 billion to the cause between now and 2020.


The Gateses aren’t the only people committed to the family planning cause. At the same summit, UK Prime Minister David Cameron promised to double the UK’s spending on international family planning to $1.6 billion over the next eight years.

In total, the summit collected $2 billion in pledges from developing nations and another $2.6 billion from wealthy countries and foundations.

We aren’t suggesting that all these billions of dollars are going to pour into FHCO’s piggy bank, but you can bet that enough of those dollars will come FHCO’s way to keep the company growing and profitable for many years to come.

New subscribers: BUY 700 shares of Female Health Company, symbol FHCO, at $6.50 or better. Place a protective stop to sell ALL your shares at $5.50.

Linn Energy (LINE)

Linn Energy also has a great history of raising its dividend. The distribution history chart below shows that Linn has increased its distribution by 81% since its IPO in January 2006. The distribution for the last two quarters has been $0.725 per quarter.


New subscribers: BUY 100 shares of Linn Energy, symbol LINE, at the market. Place a protective stop to sell ALL your shares at $35.

Philip Morris International (PM): PM is scheduled to pay out a 0.77-cent-per-share dividend near the end of September, but there is a very distinct possibility that amount will increase.

Phillip Morris (PM) Dividends Paid

Jun 25th, 2012 $0.77

Mar 27th, 2012 $0.77

Dec 20th, 2011 $0.77

Sep 23rd, 2011 $0.77

Jun 21st, 2011 $0.64

Mar 22nd, 2011 $0.64

Dec 21st, 2010 $0.64

Sep 22nd, 2010 $0.64

Jun 22nd, 2010 $0.58

Mar 23rd, 2010 $0.58

Dec 23rd, 2009 $0.58

Sep 24th, 2009 $0.58

Jun 22nd, 2009 $0.54

Mar 23rd, 2009 $0.54

Dec 23rd, 2008 $0.54

Sep 11th, 2008 $0.54

Jun 26th, 2008 $0.46


For the last four Septembers in a row, PM management has increased its dividend.

Even without an increase, PM pays out close to a 3.5% dividend and has delivered an impressive combination of dividends and capital appreciation since it was spun off from Altria in 2008.

New subscribers: BUY 50 shares of Philip Morris International, symbol PM, at $88 or better. Place a protective stop to sell ALL your shares at $82.

Plum Creek Timber (PCL)

Your account should have been credited with the first of many dividends on August 15, when Plum Creek paid out a 0.42-cent-per-share quarterly dividend.

Plum Creek has paid out that 0.42-cent dividend without fail since February of 2007.

New subscribers: BUY 100 shares of Plum Creek Timber, symbol PCL, at $39 or better. Place a protective stop at $37.

United Online (UNTD)

United Online will complete its spin-off of FTD.com in early 2013, and while it is impossible to forecast the value of the two separately traded entities, we can make some assumptions based on how much free cash flow the two companies generate.

EBITDA Multiple for FTD

Implied Equity Price per Share

EBITDA Multiple for Parents Stub

Implied Equity Price per Share Total

8 $5.24 5 $3.66 $8.90

7 $4.25 4 $3.17 $7.42

6 $3.26 3 $2.68 $5.94

Above is a table from Motley Fool that estimates the value of the two entities on an EBITDA basis. At 6 times EBITDA, United Online is worth $5.94 a share; but it is worth $8.90 at 8 times EBITDA.

We suspect the actual figure will fall somewhere between those two numbers, which means there is still a lot of upside on these shares.

And don’t forget about the 10-cent-per-share quarterly dividend that you’ll get paid in the meantime.

New subscribers: BUY 900 shares of United Online, symbol UNTD, at $5.10 or better. Place a protective stop at $4.10.


YIELD SHARK PORTFOLIO1

INVESTMENT Ref. Date2 Sym- bol

Current Rec

Price at

Issue

Latest Closing

Price

Price Target

Gain / (Loss)

%3

Divi- dend Paid

Yield Total Return

HIGH CURRENT INCOME

Annaly Capital Management 7/4/2012 NLY Buy $16.91 $16.91 0% 12.99%

INTERNATIONAL INCOME

Aberdeen Asia-Pacific Income Fund

7/4/2012 FAX Buy $7.74 $7.74 0% 5.43%

Yara International ASA

6/29/2012 YARIY Buy $41.53 $43.23 4% 2.70%

BEST OF BOTH WORLDS

Plum Creek Timber 7/4/2012 PCL Buy $39.51 $39.51 0% 4.22%

Philip Morris International 6/29/2012 PM Buy $86.91 $88.19 1% 3.46%

1 This sheet represents our current portfolio recommendations and is not a comprehensive track record.

2 Reference date is the release date of the publication when the recommendation was originally made in Yield Shark.

3 Includes dividends

. . . . .Questions and Answers

Question: The ETF Special Report recommends individual stocks and ETF investments. It also claims there are mutual funds available but does not provide any specific fund choices. Why not?

Answer: The ETF report was intended to introduce you to what we consider to be the three best income-focused ETFs. It was not, however, a recommendation list.

For now, those three ETFs are on our watch list, and we will notify you when you should buy any of them (or other ETFs).

Question: In your August issue you recommend for new money in PM a protective stop at $82. However, in earlier issues you had set the stop at $67. Are you raising the stop for PM?

Answer: Yes, please raise your protective stop on Philip Morris International to $82.

FHCO Question #1: Could not help but notice on the chart for FHCO that your new recommendation was a constant $6.00 a share for most of the day, but around 2:30 PM on 8/28/12 the price spiked up to $6.07, and further, to $6.50, a little later.


I was wondering if your information is leaking out before the email is sent. It would be a great disservice to us if members were getting the information a few hours later as the price went up for lack of volume. How can we be sure we are not making someone else rich with your recommendations prior to our receiving them?

Answer: I am sorry, but you are incorrect. Female Health Company hit a high of $6.07 on August 28, not the $6.50 you claim.

You are correct that FHCO did jump in price the day after we recommended it, but did you notice that it also jumped by a similar amount on Friday, August 31 – three days after Yield Shark was delivered? And as of now, FHCO is up quite nicely from where it was recommended.

Also, the average daily trading volume of FHCO had been 89,000 shares a day, but trading volume was 52,000 on August 28, which is 41% below the average volume. If someone was front-running ahead of Yield Shark, we think you would have seen a big increase in trading volume instead of a 41% decrease.

FHCO: Stock Quote & Summary Data

$ 6.75 0.28 ∆ 4.33%

Aug. 31st, 2012 Market Closed

Last Sale $6.75

Change Net/% 0.28 ∆ 4.33%

Best Bid/Ask N/A / N/A

1 Year Target

Today’s High/Low $6.80 / $6.45

Share Volume 40,087

50 Days Avg. Daily Volume 93,500

Previous Close $6.47

52 Week High/Low $6.91 / $3.76

Market Cap $192,485,315

Furthermore, there are no options for FHCO.

However, we do take our responsibility to you and our other Yield Shark subscribers very seriously, and Mauldin Economics operates under a very strict code of ethics that restricts all employees from investing in stocks we recommend.

Prohibited Practices: The following are prohibited for every Employee:

1. Buying a security that the Employee knows or has substantial reason to believe is likely to receive a New Recommendation within the ensuing 30 days unless the above prohibition is waived by a compliance officer and is disclosed in the Recommendation.

2. Buying a security that has received a New Recommendation to BUY, if the Employee’s purchase is made earlier than 3 PM Eastern time on the calendar day following publication of the Recommendation.


3. Buying a security that has received a New Recommendation to SELL, if the Employee’s purchase is made before 3 PM Eastern time on the 30th calendar day following publication of the Recommendation.

4. Selling a security for which the most recent Recommendation is to BUY or HOLD (i) within 45 days of the Recommendation without obtaining the prior approval of a Compliance Officer or (ii) before 3 PM on the 2nd calendar day following notification to ME subscribers that such a sale is forthcoming; but excepting sales made at or above an explicit target price provided in the Recommendation.

5. 5.Communicating to any person other than another Employee the substance of a forthcoming Recommendation except as reasonably necessary for the performance of the Employee’s duties.

6. Soliciting or accepting any thing or service from any person other than ME in exchange for making, influencing, accelerating or forestalling a recommendation.

FHCO Question #2: Could you list a maximum price at which we should buy your recommendations? You recommended FHCO on August 28 after the market closed. It gapped up the next morning. I bought it about 30 minutes after the market opened, and it was already up 10% from the close the day before. I hesitated before buying it, not knowing whether it was still worth buying at that price. I have had that uncertainty with several previous purchases, as well.

Answer: All our buy recommendations will specifically state what you should pay as either (a) buy at the market or (b) a limit order with a maximum price, i.e., “buy at $5.00 or better.”

If we do not state a maximum price, you may assume that we want you to buy at the market, which is what we recommended for FHCO.

Stop-Loss Question #1: Regarding stop losses, do you believe they are safe in today’s environment? In a flash-crash-like scenario, or in a setting like the one where the Knight Capital trading system went haywire, you could end up selling your position at a horrible price for no reason.

Answer: While we believe that stop losses are an important risk-management tool, there are limits to what that strategy can do for you.

Stop-loss orders are not ironclad guarantees, because a limit order turns into a market order once the target price is hit. It is possible for a stock to keep falling after it hits the target price, but it is also possible for the stock to rise.

For example, even though you may have a stop-loss order at $5.00, your order could get filled at $4.90 (lower) or $5.10 (higher).

In the case of a flash crash, a stop loss would not offer any protection. However, we aren’t aware of anything that would offer absolute protection.


Stop-Loss Question #2: Do you believe stop losses are appropriate for some of the less liquid securities? A great example would be FHCO. It normally trades 90k shares per day, and since your recommendation, there are a lot of Yield Shark subscribers involved. If there are several 100k worth of stop losses out there and if they’re triggered, the stock is going to get pounded. Put differently, if I were a savvy market maker, aware of the stop price, on a slow day I could lean on an illiquid stock and trigger the stops.

Answer: You are correct that stop-loss orders for thinly traded stocks can be a problem. That is why, as our Yield Shark family grows larger, we will need to focus on stocks with substantial trading volume.

Yield Shark is still a young publication (the first issue was in June), but we are growing, thanks to the confidence people like you have placed in us.

Stop-Loss Question #3: For performance purposes, how will you price the exit value of a trade where a stop is triggered? Will you use that day’s close? Certainly, it’s a stretch to assume everyone can get out at the stop price.

Answer: There isn’t a perfect answer for the performance calculation issue. Any assumptions we make won’t apply to 100% of our subscribers, but our goal is to be fair and, most important of all, consistent.

We will assume that everyone will get out at the stop price. We will also assume that everyone will get in with “grab-gain” limit orders, even though some people could get filled at higher prices.

Asset Allocation Question #1: I am interested not just in how you manage the income-based portfolio with which Yield Shark is concerned, but what John Mauldin believes would be a good allocation by category of a larger, total portfolio of which the Yield Shark investments are but one category – i.e., what percentages should I have in income-based instruments, stocks of various descriptions, bonds (corporate, government, etc.), commodities, precious metals, etc.? In other words, how would John Mauldin define a good, diversified portfolio, suitable for today’s international financial market conditions?

Answer: The goal of Yield Shark is to generate a high level of current income with a moderate, prudent amount of risk. Our secondary goal is to seek long-term capital appreciation.

While we will diversify our portfolio over a variety of sectors, industries, and even countries, Yield Shark is not an asset-allocation vehicle and should not be considered as such.

Also, please note that the recommendations in Yield Shark come from the Mauldin Economics research team, not just from John Mauldin himself.

Asset Allocation Question #2: Are you designing your recommendations based on the assumption that an investor is placing 100% of his or her portfolio in your recommendations?

Answer: Yes, we are assuming that you place 100% of your portfolio in Yield Shark recommendations.

Question: I will start drawing out money from my IRA in 4 months, but that won’t affect the money invested in recommendations from Yield Shark. Do you recommend not drawing the money out for 5 years? In giving future recommendations, please make it clear if they are not appropriate for a tax-deferred account.


Answer: No two people’s situations are the same, and taxes are a complex, highly individualized matter. We’re sorry, but we cannot provide individualized tax advice. We recommend you consult your tax advisor.

Question: I am a bit disappointed by your announcement received on 7/25/12 that gave me the impression your new Yield Shark service had yet to be published. I came to find you had made recommendations in early June. I had just invested in UNTD and now plan to sell it almost immediately, having learned that you had already made a huge profit on it. I expect it may now decline or is an investment that needs to be looked at differently.

Answer: The first issue of Yield Shark was published in June 2012, but of course not everyone started their subscription at the same time. We can understand your frustration, and we apologize for any misunderstanding.

Question: You wrote, “Finally, we believe the dividend is extremely safe, because of Linn Energy’s hedging strategy as well as a super-conservative payout ratio of 56%.”

This is not the appropriate metric. The coverage ratio, as reported for 2Q, is only 0.97. This is not healthy. They don’t have sufficient cash flow. You want a coverage ratio of at least 1.2.

Answer: There are several ways to evaluate risk, including the safety of the dividend payout as well as the different time frames in which the risk evaluation is conducted.

The coverage ratio you mention is for one 90-day period, and while that metric is useful, we believe a longer perspective provides a more accurate indication of the safety of the dividend. Sorry, but we respectfully disagree with you.

Question: How does the potential vulnerability of the Australian dollar affect your FAX recommendation?

Answer: We are keenly aware of the macroeconomic conditions that could negatively impact Australia and the Australian dollar. We will immediately notify you if there is a change to our recommendation.

Bear Market Question #1: According to John Mauldin’s writings, at this time in the secular cycle it is best to invest in stocks with a low P/E ratio, yet some of your picks (e.g., FAX, PCL) are on the high side. I also note that they did not fare well in the last downturn in 2008, so I am guessing that they are not recession-proof. Am I wrong about that?

Bear Market Question #2: I just subscribed to Yield Shark and see some of the recommendations state to buy at market if you are starting out. I’m nervous about investing when markets are at 4-year highs. (I’m trying not to buy high and sell low.) Am I correct to interpret that, despite the market highs, these picks are recommended to purchase at market, with stop losses in case the worst happens?

Answer: Like all bear markets, 2008 was a very painful year for stocks, and finding pockets of safety, let alone winning stocks, was pretty darn hard.

You would be correct to assume that if we enter a bear market again, the stocks in the Yield Shark portfolio will be affected. However, there are two important risk-management tools that should help to minimize the damage.


First, dividend-paying stocks have historically held up much better than non-dividend stocks, and we would expect the same going forward.

Secondly, we have put in fairly tight protective stops to prevent small losses from turning into large ones.

Finally, if our recommendation is to buy at the market, we would like you to buy at the market.

Question: I signed up for Yield Shark but was not ready to transition my portfolio at that time. I am now, and have been reviewing the original recommendations compared to where those opportunities are today. In particular, NLY was around $7 when recommended but is now over $7.90. Should I begin my investment with your original recommendations or modify them to reflect today’s realities?

Answer: Please review the portfolio table at the end of each Yield Shark issue. It contains specific instructions on what stocks new subscribers should buy, how many shares to buy, and what price you should pay for previously recommended stocks.

Regarding new recommendations, we will specifically state what price to pay as either (a) buy at the market or (b) a limit order with a maximum price, i.e., “buy at $5.00 or better.”

If we do not state a maximum price, you may assume that we want you to buy at the market.

Question: Recently, Linn Energy subtracted a 35% withholding tax on the dividend of US$0.72 per share. Is an LLC more heavily taxed than a normal share?

Answer: You should always consult with your tax advisor on tax questions, but Linn Energy has a very useful explanation of how its dividends/distributions are taxed. Go to http://ir.linnenergy.com/faq.cfm?faqid=3

. . . . .

http://ir.linnenergy.com/faq.cfm?faqid=3

http://ir.linnenergy.com/faq.cfm?faqid=3


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