Thoughts on DFN : Dividend 15 ?
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Thread: Thoughts on DFN : Dividend 15 ?

  1. #1
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    Thoughts on DFN : Dividend 15 ?

    I just saw the ad in the GAM today for the dividend15 with a yield of 10.7%.
    A little research showed this has actually paid a $0.10 monthly dividend for the past several years even through the latest market slump.

    This is a split stock company that has both preferred and common shares of 15 Canadian Blue Chips.

    The MER seems to be 1.5%.

    Has anyone held this long-term?


  2. #2
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    I don't see much insider participation.

    I think I would prefer either to hold the securities individually, or invest in XDV; or CPD, CDZ or XTR in a tax shelter. They hold more securities at a smaller MER.
    Last edited by Soils4Peace; 2010-04-17 at 10:21 PM.

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    Senior Member humble_pie's Avatar
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    oh, my. This instrument is a potential disaster. It's a split, so it offers class A shares and preferred shares.

    the preferreds pay a dividend north of 5% and are backed by the blue-chip dividend-paying stocks in the portfolio.

    class A shares pay a dividend north of 10% that's backed solely by an option writing program including - here's the dangerous part - invasion of capital. Not invasion of the original common stock, because this is pledged to the preferred shareholders. However capital gains that occur as markets rise & short option positions get exercised are paid out to class A shareholders in order to beef up that unrealistic 10% dividend.

    a more reasonable program would have class A shareholders benefiting from option sales alone. In a prudent strategy, capital gains from assignments would be reinvested in additional common stock. As a matter of fact, in a properly-managed strategy there would be almost no assignments. A reasonable program paying out only the proceeds of option sales would produce a modest return for class A shareholders of approximately 5-6%. The combined return from both dividends and option sales from the 15 large cap underlying companies would hover near 10% per annum. This is far below the unsustainable 15% that this instrument is throwing off.

    although the preferred shareholders are protected, the class A shareholders are cannibalizing themselves. Come a prolonged plateau or downturn in the market, there will be no capital gains to pay out. Worse, the option premiums will drop, unless the manager increases put selling, although the structure of the instrument (ie protection of capital for benefit of preferred shareholders) will fix a limit on that.

    another fatal flaw for class A shareholders is the transformation of what should be most-favourabliy-taxed capital gains into less-favourably-taxed dividends paid to the shareholder. This is especially harmful as we enter the present era of federally-prescribed gradually lower dividend tax credits. This negative feature alone is enough to disqualify dfn from serious consideration.

    the pity is that many will believe that the 10% return on class A shares arises from dividends. Fortunately for the public, some doubts have been raised by a few bloggers & financial writers. The principal doubt has been absence of clarity about this instrument's operations.

    clarity ? One could describe dfn class A as a ponzi scheme that flourishes in bull markets. Write call and put options. Shares rise and get assigned. Recklessly pay out exaggerated dividends with gains from share sales under assignment. Replace distributed cash with incoming money from new investors attracted by the astonishingly high return. Buy new shares. Write more options. Bankroll just enough cash to support excessive dividend through short-lived downturn or crash periods like the 6 months oct/08-mar/09. Have zero strategy for prolonged downturns or frank recessions. Rinse and repeat.

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    Senior Member Brad911's Avatar
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    There's a good article by Canadian financial author Larry MacDonald that I participated in giving some comments on regarding this split corp structure.

    The difficulty many investors have is figuring out "how" that yield is achieved; which isn't simply an addition of the underlying yields. The lack of transparency due to options trading is the key issue. The preferred series would be a decent investment, but IMO not the capital share version.
    Triage Investing Blog - A Source for Value & Dividend Investing

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    Senior Member humble_pie's Avatar
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    the drawback to the comments that you mention - and the reason why i didn't post the links - is that none of them take examination of the option strategy to a deep enough level. By & large they merely state that the writer doesn't "understand" the platform.

    there's nothing wrong with owning a selection of large caps, collecting their dividends & harvesting prudent option sales. Cash returns from such a combo strategy usually hover near the 10% mark, all favourably taxed, without taking into consideration any notional gain or loss in the underlying security. Since well-chosen common stock performs well over long time frames such as half-a-lifetime, this is a successful strategy.

    where this particular instrument dips down into danger is allowing assignments to proceed recklessly & using these gains from assigned stock sales to beef up the class A dividend, ie the class A shares are cannibalizing themselves. Such a fund must either attract new money - perhaps that's why we're seeing the ads - or it will consume itself. It's worth noting that in any winding-up of this fund, the preferred shareholders will have the right to the original blocks of underlying stock, while the class A shareholders will take the leftovers if any. Should there have been excessive put sales in a down market, for example, there could be little or nothing left over for the class As.

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    One thing that is not mentioned in posts or links is that DFN trades at a premium to its asset value. Right now the asset value is ( common and preferred shares combined) is 20.36. Now take away the preferred share -$10 you have 10.36 while the stock is trading at 12.52. No wonder they are always selling more stock in secondary offerings any time the stock get high to dilute the premium.

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    Quote Originally Posted by Doug Out West View Post
    One thing that is not mentioned in posts or links is that DFN trades at a premium to its asset value. Right now the asset value is ( common and preferred shares combined) is 20.36. Now take away the preferred share -$10 you have 10.36 while the stock is trading at 12.52. No wonder they are always selling more stock in secondary offerings any time the stock get high to dilute the premium.
    True.

    Another point to my way of thinking is that the capital shares are intended for capital gains - dividends are gravy. When I look at the underlying portfolio plus the last couple of years trading range for DFN, both are in the upper ranges. I'm not expecting booming growth in those areas.

    On that basis alone, I'd look for other opportunities.

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    Dfn-dividend 15

    Is this similar to PIC.A ?

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    Dfn dividend 15

    Perhaps I should ask if PIC.A is similar to DFN
    I hold PIC.A and after reading the above,
    I think it's similar and I'm now considering
    getting rid of it after the next distribution.
    Your thoughtful insight on PIC.A is greatly appreciated.

  10. #10
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    Quote Originally Posted by AMABILE View Post
    Perhaps I should ask if PIC.A is similar to DFN
    I hold PIC.A and after reading the above,
    I think it's similar and I'm now considering
    getting rid of it after the next distribution.
    Your thoughtful insight on PIC.A is greatly appreciated.
    Check the prospectus and financial statements. What is the payout?
    How is it divided? When would it be suspended?

    The criteria is how much of the combined preferred plus capital share dividends
    can be paid out of the portfolio income. Then too, look for statements commiting to
    option writing and high payments to the manager.
    Another check is now often more shares are being offered - is it reasonable?

    Fictional Example:

    Capital plus Preferred dividend = $0.60 + $0.70 = $1.30
    Outstanding Capital shared = Preferred shared = 1000 [ as I said, fictional ... *grin*]

    For a reasonable invesment:
    Over the last five years, the porfolio income has been minimum $1500/year
    Manager charges $200 / year
    Requirement is for $1300 / year while cash is $1300 / year.
    If the portfolio has a low turnover + rising dividends + few offers of
    new shares, it should be in good shape.

    For a risky invesment:
    Over the last five years, the porfolio income has been minimum $1000/year
    Manager charges $500 / year
    Requirement is for $1300 / year while cash is $500 / year.
    If the portfolio has a high turnover + rising dividends + offers new
    shares every six month, it is a risk.


    I'm guessing that since for PIC.A, the Capital dividend is less than
    the Preferred, this is better than DFN when the Capital dividend is $1.20 /year and
    the Preferred is $0.54 / year.

    Bottom line is that unless someone else goes through the details for you,
    you might have to do some research to check.


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