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Monday, December 31, 2012
What business will never go out of business?
What business will never be shut down by the government?
"In this world, nothing can be said to be certain, except death and taxes," Benjamin Franklin wrote in 1789. He knew the business I'm talking about...
The business of government tax collection – the Internal Revenue Service (IRS) – will never go out of business. Your business may succeed or fail... But the IRS will live on.
And some investors are getting the IRS to pay them 7.4% a year...
I know what you're thinking... The IRS you know takes one-third of your income each year. It doesn't pay you an income – right? But they're one and the same. It's the huge opportunity that we have today...
Who does the IRS pay when it rents an office building? Is it the federal government? No, actually – the IRS has a landlord. It's called Government Properties Income Trust (NYSE: GOV).
GOV is a business that rents the buildings it owns to the government. And the IRS is GOV's biggest tenant (measured by square footage). The next-biggest tenant is U.S. Customs & Immigration. Together, they make up over 20% of GOV's rental income.
None of these "businesses" are going out of business. These departments of the federal government will be around a decade and even a century from now.
GOV takes advantage of it by becoming the government's landlord. And smartly, it pays no income taxes on the rent it earns...
You see, GOV is a real estate investment trust (REIT). As a REIT, it has a special tax status, where it doesn't have to pay income taxes on the rent it collects. Instead, it passes along nearly all the rental income it earns to you, in the form of dividends. As long as it passes its rent along to you, it can keep this special tax status.
As I write, GOV pays a hefty 7.4% dividend. That's an incredible dividend in our zero-percent world. And thanks to GOV's long-term contracts, it's safe!
You see, GOV is successfully locking in very long-term leases at rates above 8% – to government tenants that are not likely to default. GOV also protects itself by building in inflation adjustments and property tax adjustments if either of those gets out of line as well. GOV has it covered. Your dividend is safe.
Investors should bid up shares of GOV going forward. Its 7.4% dividend is very attractive in a world of zero-percent interest on bank deposits.
The other thing GOV has going for it is that "cap rates" on commercial real estate are near 5.5%. The "cap rate" is the annual return on an investment building from your rent – after expenses. In short, it is the rent – after expenses – divided by the building's cost. (It is the most commonly quoted figure in rental real estate.)
If cap rates are near 5.5%, investors should be willing to pay more for GOV's portfolio that has a built-in yield of 7.4%. Investors will push the share price of GOV up. At a 5.5% cap rate, the fair value of GOV's shares would be 30% higher than today.
Going forward, GOV should have no problem paying – or even increasing – its dividend. That's a big reason why the company is a buy in my True Wealth newsletter.
So if you're looking for a safe place to earn high yields, how about making the IRS pay you 7.4% a year?
IMPORTANT NOTE: GOV shares are thinly traded. So if you buy, make sure you use a limit order. This lets you determine the price you're willing to pay... and you won't get stuck chasing the stock higher because your trade won't go through if shares are trading above it. And don't pay more than 1% or 2% over Friday's closing price.
Last year, self-made multimillionaire Mark Ford showed readers another way to become a government landlord… "Every month, the government deposits $1,250 into my bank account," he wrote. Get the details here: Why the Government Pays Me $1,250 Every Month.
DAILYWEALTH NAILS IT WITH OUR ETF ANALYSIS
The 2012 ETF winners and losers are no surprise to regular DailyWealth readers...
We monitor a list of more than 80 exchanged-traded funds (ETFs). This list lets us keep tabs on every major stock sector, currency, and commodity and its price performance.
Sitting at the top of our "2012 performance" list is the iShares Homebuilder Fund (NYSEARCA: ITB). This fund is a diversified basket of America's largest homebuilding companies (with a smattering of related businesses). So far this year, the ITB is up a huge 78%. This gain shows how "dead on" Steve Sjuggerud has been with his real estate research... And his readers are making big gains because of it.
At the bottom of our list is a familiar face. It's a fund we've heaped a lot of abuse on over the years: the popular United States Natural Gas Fund (NYSEARCA: UNG). The fund aims to track the performance of natural gas, but its flawed structure makes it "bleed" value from shareholder accounts. Our favorite whipping boy is down 29% this year.
You can see the big results of our "homebuilders good in 2012, UNG bad in 2012" idea in the chart below. It plots the performance of ITB (the black line on the chart) versus the performance of UNG (the blue line). Again, we're not surprised!
– Brian Hunt