Eclectic,
that's my problem. I don't understand the prospectus,
financial statements nor the options strategy.
At the time, I only cared that the class A shares paid
over 10% and they consisted of relatively safe bank stock.
Humble Pie,
could you please provide the same on PIC.A,
as you so thoroughly detailed DFN.
With several of the prspectus I've read, I've had to re-read them a couple of times - in some cases, putting them aside before re-reading them. So it may take a while.
Some factors from the prospectus that will help are:
a) statements indicating what is expected to pay for the dividends. One I looked at indicated that the preferred shared dividends were from the portfolio while the capital shared dividends were to be a combination of portfolio plus options.
b) events that cancel the dividend payment. One stated that the capital shared dividend could be suspended at managements discretion. This means in a downturn, costs can be cut (though the capital share price likely would be hit as investors don't like dividend suspentions or cuts).
c) what stocks are in the portfolio. This isn't a likely example but if the lowest yield on a stock in the portfolio at the time the original shares were issued was 5% and the combined preferred/capital yield is 4% - then options aren't required to fund the payouts.
As for the financial statements, you are most interested in the items that will affect the ability to fund the total dividends. Some of the key factors will be income (if you are lucky, there will be some indication of how much is portfolio income and other sources) and expenses - particularly fees for managing the portfolio/options writing.
As well, check how many shares are outstanding. Management can issue more and investors can redeem unit, so the original number in the prospectus is not the number to use to figure out how much the total dividends work out to.
Example:
Prospectus says -
1 Capital share is issued for 1 Preferred
1 million outstanding (so 1 million capital and 1 million preferred)
Portfolio is to pay for all of preferred and some of capital dividends.
Dividends can never grow, preferred always paid and capital paid at manager's discretion, where capital is paid $0.64 yearly/share and preferred is paid $0.86 year/share.
Starting requirements are 1 million x ($0.64 + $0.86) = 1.5 million / year
Financial statement
Total Income = 2 million
Managers Fee = 1.2 million
Ignoring that there could be other expenses, already it looks like it is not sustainable. They need 1.5 million if both dividends are to be paid and they only have 0.8 million available. The total income inclues options so their only other source of money is to sell more shares.
As for the options strategy, I haven't figured out a way to get a handle on this. The best so far that I've seen is the financial statements spelling out how much of the total income was portfolio income, how much was interest, how much was options strategy.
The other two gauges that I can think of are:
1) check
www.sedar.com to see how often new shares are being offered.
2) check the fund's website for tax forms on the PIC.A distributions. I believe that using new shares proceeds should be classed as return of capital (RoC). If the tax forms are showing steady RoC over several years, I'll be concerned.
I wish it was the "good old days" where the split shares were all dividends to preferreds, capital shares are all capital and none of this unclear options writing stuff!!