# Rethinking Dividend ETFs...



## Mike59 (May 22, 2010)

Hi all,

I'm torn between a CDZ/XDV focus vs. simply buying 10 Canadian stocks that approximate the market and relying on their dividends. In exploring ETFs, why do they generate so much interest/Return of capital despite being advertised as a "Dividend" fund (up to 50%+ of "non-dividend" income in some cases)? Reading through old posts highlights this fact, but I haven't gathered an explanation as to why interest income comes from these large players and aristocrats...

With a goal of generating as much eligible dividend income as possible from this particular account (as it's a Non-Registered CCPC account), would it not make more sense to simply buy 10-15 large-caps and throttle their allocation/yield as I please? 

A question to more experienced investors, are there particular sectors or companies in the market that are known to produce interest income inside these ETFs? (I will consider avoiding them!) Thanks!


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## humble_pie (Jun 7, 2009)

imho too many funds are including futures, derivatives & other income-boosting products. There are many threads in this forum that deal with the pitfalls of such engineered products, including possible failure of counterparties.

i would hazard a guess that no senior canadiand dividend payors pay "interest" except upon their debentures or notes. Any "interest" an income or dividend fund pays out has to be derived from trust unit holdings, debentures either convertible or straight, or other interest-bearing paper within the fund.

whenever i want to see what an individual fund is up to, i look under the hood at the most recent full list of holdings. Not the top 10 holdings, or the top 20. Rather the complete list. Like a CAT scan, this displays exactly what is going on. I pay almost no attention to what the advertising or marketing documents say.

i for one am 100% for avoiding dividend funds and for buying the common shares of a variety of stable dividend payors in outright ownership instead. Management expense is zero. Then learn how to sell & manage a conservative option strategy on the top. Returns should be 7-10% a year. One should keep in mind the downside risk inherent in any common stock ownership.

benefits will be eligible dividends with their dividend tax credits, capital gains income from ongoing option sales, and slow-but-steady longterm appreciation in the price of the underlying stock. Another useful benefit of outright ownership is that the investor can more easily plan & control the income streams & their tax consequences.


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## Lephturn (Aug 31, 2009)

humble_pie said:


> i for one am 100% for avoiding dividend funds and for buying the common shares of a variety of stable dividend payors in outright ownership instead. Management expense is zero. Then learn how to sell & manage a conservative option strategy on the top. Returns should be 7-10% a year. One should keep in mind the downside risk inherent in any common stock ownership.


I'm with humble on this one - this is my plan for my retirement accounts.

I will note that another conservative options strategy is a collar - which will protect you on the down side and in recent studies out performs a pure covered call strategy. Maybe this is what humble refers to - it is certainly only one of the conservative options strategies you might choose.

I think there was an update this year - but here is the study: http://www.optionseducation.org/press/archive/2009/sept_23.jsp

That said - you do have to be willing and able to dig in and learn to do the options strategy yourself. It's not difficult or time consuming once you learn, but it will take some work and education to learn. You can start here: http://www.optionseducation.org/


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## Belguy (May 24, 2010)

Because I consider myself to be a simple man, I am a buy-and-hold investor mainly in broad-based, lowest fees ETF's.

Ten percent of my investments are in emerging markets ETF's and about 7 percent in the RBC Global Precious Metals Fund.

On the other hand, I see nothing wrong with buying and holding a diversified portfolio of 15 or so individual dividend paying stocks with a history of increasing those dividends over time. Invest in companies that you feel will thrive and be around for the long run.

The key word here is HOLD through all market conditions and avoid trying to time the markets.


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## Square Root (Jan 30, 2010)

Agee that a portfolio of 10-12 solid dividend payors is bettr than a dividend ETF. This is especially true once you retire and start 
iving off the diviends. When a portfoljo yields 3-4% why would you give 50bps away to an ETF? The diversification isn't worth that much in my opinion. Did you see those bank returns over 24 years in the G&M this am? Obviously 2-3 banks would be in your portfolio.


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## humble_pie (Jun 7, 2009)

lephturn to be honest i have never liked collars and today, now that they have become debit spreads, they are less attractive to me than ever before.

a classic collar boxes the investor in, with no return or only pennies, so he is left treading water in one place. It's true he won't go down, at least not by very much, but on the other hand he won't get ahead very much either. What he does receive are the dividends.

what's worse is that, in the collar spotchecks i ran recently, i noticed that in all cases the cost of buying the downside put now significantly exceeds the premium received from selling the upside call. In other words today's debit collar strategist now has to pay for protection. Historically this was not the case. In the classic collar, the call sale would fetch a few more pennies than the put cost, allowing the investor to keep on treading water while providing risk-free dividend income.

with the reversal in put & call premiums, this conservative strategy has become toast. It's true that the investor can lower the put cost by buying a lower strike price, but then his downside risk increases, which eats into his dividend return. Sic transit gloriae mundi.


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## HaroldCrump (Jun 10, 2009)

Belguy, to be fair, you are not entirely _a buy-and-hold investor mainly in broad-based, lowest fees ETF's._
You have your fair share of frindge, sector-specific, region-specific ETFs, such as the precious metal, the emerging markets and a few others you keep mentioning from time to time.

While many of us research and cherry-pick individual stocks, you research and cherry-pick individual ETFs.

I understand the buy-and-hold part, but don't quite agree with your "broad-based lowest fee" claim.


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## Lephturn (Aug 31, 2009)

humble_pie said:


> lephturn to be honest i have never liked collars and today, now that they have become debit spreads, they are less attractive to me than ever before.
> 
> a classic collar boxes the investor in, with no return or only pennies, so he is left treading water in one place. It's true he won't go down, at least not by very much, but on the other hand he won't get ahead very much either. What he does receive are the dividends.
> 
> what's worse is that, in the collar spotchecks i ran recently, i noticed that in all cases the cost of buying the downside put now significantly exceeds the premium received from selling the upside call. In other words today's debit collar strategist now has to pay for protection. Historically this was not the case. In the classic collar, the call sale would fetch a few more pennies than the put cost, allowing the investor to keep on treading water while providing risk-free dividend income.


I do see what you see for traditional collars, but I can still do it with a bit of good timing and some strategy. What I mean is that I will time when to buy my puts - I make sure to do so when I've had a nice run up in the stock so I am getting them cheap. As a stock goes up implied volatility will drop, option prices will drop, and I can get a put cheaper at that point. I am also using time value as an advantage - I buy puts about 6 months out and sell calls usually monthly - so the increasing time decay I collect on the calls and the longer dated puts decay at a much slower rate so I am netting theta on the trade. iVol helps drive my timing around this one as well - if the vols are down and the prices are low, I won't necessarily just sell a call right away. It's going to work better if I can get some puffed up volatility and call prices when I sell the calls.

Outside of my registered accounts I'll get more aggressive and do things I can't do in registered like ratio spreads.

It's not nearly the slam-dunk it was agreed, and especially on dividend payers it's not always worth selling the upside call - at least not right away. More patients is needed certainly, and in an uptrending market this strategy will under perform the market, but when next have another 2008 situation this strategy will vastly out-perform.

In the end - all I really want is to collect the dividend and minimize how much I pay for my downside protection. Since I'm in it for the dividend and the price of the shares is not a big issue (the dividend is what I'm after) I can set the puts low enough to get away with it. Am I generating additional revenue doing this? Not really. The idea is just to spend little or nothing to protect against major drops - the kind that might be precipitated by or lead to a cut in the dividends.

Since those "once every 10,000 year" events seem to be about every 10 years in reality, I'm happy to under perform a bit for long term protection.


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## kcowan (Jul 1, 2010)

HaroldCrump said:


> While many of us research and cherry-pick individual stocks, you research and cherry-pick individual ETFs.
> 
> I understand the buy-and-hold part, but don't quite agree with your "broad-based lowest fee" claim.


I have said this before. And the claim that such an approach beats money managers is also unsubstantiated by any track record for such an approach.

I have no problem with his approach but I don't think anyone should be promoting it as an approach until it has been independently tested.


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## Belguy (May 24, 2010)

My advice to new investors stands. Invest in a short portfolio of the lowest fee, broadest based ETF's.

What I am trying is something on the side by investing a small portion of my portfolio in the RBC Global Precious Metals Fund and in emerging markets ETF's.

I don't think that there is all that much cherry picking going on here. My core portfolio still consists of those low fee, broad-based ETF's with a tilt to value and smallcaps.


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## humble_pie (Jun 7, 2009)

lephturn again i beg to differ.

we've already had the "nice run up" in stock markets that you mention. Therefore, by your collar strategy, puts should be at their cheapest. Yet in reality, with respect to highly-liquid canadian blue chip dividend payors, the near-the-money puts are far more expensive to buy than any price that can be obtained from selling near-the-money calls. So the strategy, with its option debit, leads to an increased cost base for the total position. Dividend yield is therefore diminished.

on a practical note, can you find a reasonable collar that is not a debit spread. I find none. I've looked at 3 canadian banks, bce, ala and cpg. Priced by today's markets, collars are costing a whopping premium.

as for buying puts with low strikes as protection against downturns, if the investor is aiming solely to capture the dividend & is not bothered by downturns, then i am wondering why would he waste his money buying puts.

and if he is thinking to insure only against major crashes such as 08/09 with a far OTM put, it's well-known that most of those who panicked & sold at low prices are, today, still noticeably behind those who held on. A slim advantage from a put with a low strike price is that it permits the investor to keep the stock & profitably sell his put instead, if he chooses that route.

what i like with dividend stocks are short strangles. It's a matter of turning the put in the opposite direction. Sell an otm put plus sell an otm call. With a strangle the investor captures the full premiums of both the calls and the puts. Current yields from option sales & dividends - not including any appreciation in the underlying stock - can be driven as high as 8-10%. Stocks trade in a predictable band most of the time, so the investor is always selling calls near the top of the band & puts near the bottom. 

strangles are less aggressive than their straddle cousins. It's worth noting that it's usually said that pro traders never do straddles.


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## Lephturn (Aug 31, 2009)

The initial collar will be a debit of course - mostly because I am buying a 6 month out call and selling a 30-60 day call.

BCE is right about $35.00 today - it pulled back some today. It just so happens that I bought some for an RESP last week at 33.05. I can get a May 2011 32 strike put at bid .45 and .53 ask last traded at .48 - I'm going to say I'll offer .50 and get it. Jan 2011 36 calls are cut in half right now due to this little pullback, so normally I would wait here. Last traded at .16 but let's say I hit the bid and sell at .15. I could have sold these yesterday for .28 or so (this is why patients is key and not buying the spread all at once is important) - but I'll say I'm pulling the trigger here at .15. If I spend .50 every 6 months, that's 1.00 every year for my protection. If I did sell the call for only .15 every 2 months I can get .90 a year - still a debit but a tiny one. What I will do instead is be patient and sell the calls when the stock is moving higher or volatility is up and they are priced higher. The initial collar will not be a debit, but it's not too difficult to make it a credit over a 6 month or 1 year period. At the very least I am getting my married put for free.

Stock: 33.05
Sell Jan 11 36 Call at .15
Buy May 11 32 Put at .50
-------------------------
Collar initially .35 debit
Sell 2 more Calls over 6 months at .20 x 2 = .40
Over a 6 month period this is now a .05 credit

Now on top of that, when the stock moves up and conditions warrant it, I'll roll that put up higher - I usually end up with puts that are higher than my cost basis locking in profits.

Also note - just because I buy a put doesn't mean I dump the stock when it goes down! Instead I just sell the put and collect the cash, where I can use it to purchase more shares. This turns decreases in the stock's price into accelerated gains - from a dividend point of view I have now lowered my cost basis and increased my yield to cost. And I've done it for essentially free.

In regards to short strangles - when the conditions are right I agree it's a great strategy, but not one you can run in a registered account. In my non-registered I like it when things are sideways. There are so many more strategies like ratio spreads you can run in cash accounts that are not allowed in registered accounts... damned shame I say.


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## humble_pie (Jun 7, 2009)

thanks leph good stuff i will look at your example carefully again. Although it baffles me slightly why U would mention a bce jan 36 call for a few pennies ... yes you did say you'd wait ... but what's wrong with a bce US jan 35 for 65 pennies or better ... or better yet a US june 35 for 1.50 (probably could easy get 1.60) ... and the job is done for the next 6 months ... no haggling over 15 pennies ... save on one commish instead of 3 ... plus the US open interest is far greater than canada ie these options are more liquid.

i'm coming from a place where especially in rrsp i look for long-term low-maintenance positions that can be set up & ignored.

plus, you did say you're at rbc, no ? and they are among the few that can trade in USD in rrsp without conversion, no ?

option restrictions in rrsp are a burn but they're imposed by the cra i think, not the brokerages. To keep our low, craven, gambling-addicted selves from destroying our own retirements. To get around the restrictions i always keep long stock in rrsp while trading all related short options in margin. I'm also reluctant to exchange capital gains/loss treatment in non-registered for what will be, inevitably, a 100% taxable consequence in rrsp/rrif.

collars would be good candidates for a split treatment. One could keep the buy-write in registered & the long put in margin since, as you say, if stock were to fall the put will probably be sold, not exercised. And any losses generated by repetitive rolling-over of the long put would be deductible in margin, although not in rrsp.

re sideways it's an option trader's favourite word. Are others running after the ups-and-downs ? oh please, allow me to sell some to you.


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## Lephturn (Aug 31, 2009)

Basically I only mention the shorter dated 36 calls for a couple of reasons. First - I would prefer not to called away. Granted I'll just lock in a profit and buy it back if that happens, but still...

Second - time decay. I always want to sell the steep end of the curve and buy the long end. That's a bit too cheap certainly. I might consider selling the 35s but I need to manage that and either sell ones that expire before the next dividend or plan to buy them back a couple days before to avoid a possible dividend capture.


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## humble_pie (Jun 7, 2009)

we gotta face it lephturn options in bce ess you see kay.

divi is good, though, so options are the cherry on top.

i for one would not choose trading for pennies every 2 months because the commish will eat away at the puny return. Also the cost to investor in stickhandling these tiny frequent trades is considerable. I usually sell 6 months out.

there is slim chance of a US 35 call in bce being assigned these days. Formula below clears by several pennies.

this handy formula to calculate risk-of-early-assignment comes from IB. Not fail-safe, but a practical & useful guide. Most itm options are not assigned early because remaining time value in premium is high enough to buffer them. IE dividend must exceed carrying costs + TV, which is rare & happens mostly with ditm options on hi-divi stocks.

when enough TV remains, the long option holder will nearly always sell rather than exercise. This IB formula helps to determine whether an itm option is or is not at risk for early assignment.

for calls:
if (stock minus strike) is less than option bid, there is a clear risk of early assignment.

for puts:
same formula, but calc becomes (strike minus stock).


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## Lephturn (Aug 31, 2009)

Thanks for the quick formulas - I'll plug them in to my trading spreadsheet and use them to set some alerts.

Yeah the option prices suck on BCE.  If it's worth it or not depends on the volume you are doing and the price at the time along with what you pay in commissions. At a certain point you are better off just buying the damned puts and making that money back someplace else I suppose.

Great discussion overall.

Makes me wonder if one of those funds like Dividend 15 that does this on a large scale as a mutual fund might actually be worth the fees. Let them run all the strategies with much lower transaction costs and work out if this makes up for the fees they charge - but it just might depending on how big you are trading.


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## humble_pie (Jun 7, 2009)

leph there is an earlier thread on dividend 15. Stock is to avoid.

structure is to legally separate the beneficiaries, ie the unit holders, into two separate funds.

one fund holds title to all the dividend paying stock & harvests all the dividends. This is dfn preferred A. Note that their return fluctuates around 5%. Note also that this fund retains full title to all of the stock in the portfolio. So far so good.

now please note dfn common. Holders of this fund benefit only from such options as the managers are able to sell. To maintain an artificially high payout of more than 10%, this fund can invade capital. That is, as options continually are sold, the fund managers can use the proceeds to pay the dividend instead of reinvesting such proceeds in new shares or even new options.

note also that dfn common managers can use newly subscribed monies to pay out such dividends (a ponzi-type scheme.)

note also that dfn common is - rather stupidly - converting best-tax-treatment capital gains resulting from option sales into somewhat-less-tax-favoured dividend payouts to fund holders.

in a severe 2008/09 type down market, margin or leverage gained from the long stock held in dfn.pr.A for the preferred beneficiaries will dry up, jeopardizing any continuation of option sales for the dfn common beneficiaries. Worse, since these shareholders literally own nothing except the right to continued option sales, their units in such a calamitous time could conceivably go to zero. The preferred unit holders, on the other hand, will survive a severe downturn as owners of the portfolio, howsoever diminished it may be.

i'm also underwhelmed by the experience & background of the principals. There is no history of recognized professional option trading experience among them. On the contrary, their backgrounds seem to be selling insurance products & retail investment advice.

to sum up, these people are hawking a combined return of more than 15% from dividends & option sales conducted upon one single underlying portfolio of dividend & distribution payors. Whereas the optimal return that can safely be realized from one such underlying portfolio is roughly 10% per annum. Red flags should go up instantly.


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## Lephturn (Aug 31, 2009)

Thanks for the details.

Yeah, I started digging into Dividend 15 and it's pretty crazy. I would love to find something that buys top dividend growth stocks and runs options strategies on them and just pumps out that income - 10% or whatever they can get out of it. Without all the other splitting and crap that particular fund does. The Div15 guys do the basics that I'm looking for - but then they carve it all up and do a bunch of crazy stuff that I don't want anything to do with.

Otherwise it's down to me doing it myself, but my transaction costs will eat more of it than it otherwise might in a big fund. I'd love to find something that does the nice conservative part in a fund without the shady ponzi nature of it or the weird splitting those guys do.


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## cardhu (May 26, 2009)

lephturn said:


> shady ponzi nature


Nonsense ... there is nothing shady or “ponzi” about the split structure ... it is a simple structured product.

The description given upthread is short on facts, and long on misconception and bad math ... nobody is hawking a 15% return ... they are offering a yield of less than 8%, and making no promises whatsoever about possible future capital gains. 

There are some legitimate reasons to be hesitant about DFN ... high fees for one, and the fact that it trades well above its intrinsic value for another ... but most of the objections listed above are fictional.


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## humble_pie (Jun 7, 2009)

what a slanderous outburst from cardhu. There's nothing fictional or misconceived or short on facts whatsoever about my post on DFN.

the "bad math" is cardhu's own math. The managers are offering, not the 8% that cardhu says, but a combined yield of 15.26% from one underlying stock portfolio, according to the latest from the toronto stock exchange & from thomson reuters.

as i've already mentioned, the preferred shareholders receive and are entitled to the real dividends, which yield something over 5%. The common shareholders receive whatever the managers can obtain from option sales. According to the prospectus, holders of common are not entitled to any interest whatsoever in the underlying portfolio.

the fact that the DFN common yield is exceptionally high at 10.1266% suggests that the managers may be utilizing highly aggressive option strategies that carry high levels of risk, which in turn could potentially be endangering the underlying portfolio. Or they may be cannibalizing capital to bolster dividend payouts. Or they may be utilizing new investors' funds to support the dividend payout. Although many funds do this, in order to protect the underlying portfolio, it's nevertheless a form of ponzi.


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## cardhu (May 26, 2009)

There is nothing slanderous in my post ... pie’s math is bad, and his description of the split structure is inaccurate on several fronts ... pointing that out is neither slanderous nor an outburst. 

The combined distribution is $1.725 yearly on an underlying investment with a current market value of around $22.00 ... that is a yield of 7.84% ... even measured against the Nov 30 NAV of $19.63 the yield is only 8.8% ... a far cry from humble’s pie-in-the-sky 15.26% .... note that none of the DFN prospectus, nor the Toronto Stock Exchange, nor Thomson Reuters have reported any information that corroborates pie’s bad math. 

Here’s a partial list of the fictions/misconceptions referenced earlier. 

•	No, there are not two separate “funds” ... there is only one fund ... it is a mutual fund corporation, actually ... the ownership of the corporation is split into two separate classes of shares ... not the same thing. 

•	No, the preferred units do not retain “title” to the underlying shares ... the corporation does ... the preferreds merely rank ahead of the common units (thus the term “preferred”) in distributing the NAV, at the time of redemption/dissolution ... not the same thing.

•	No, the preferred units do not harvest all the dividends ... they only harvest some of the dividends, up to a specified limit, and any amount the fund receives in excess of that limit, goes to the common units. 

•	No, the common shareholders do not own _“nothing other than the right to sell options”_ ... they own *everything* except the first $10 of NAV, and the first $0.525 of dividends received each year ... therefore, based on the most recent published NAV of $19.63, the common shareholders own $9.63 in blue-chip equities, *plus* any dividends received in excess of the 2.67% yield required to satisfy the obligation to preferred unitholders, *plus* any capital gains that might accrue during the existence of the fund, *plus* any income generated by selling options. 

•	No, there are no “common managers” ... there is only one fund, and the managers of that one fund represent all unitholders of the corporation, common and preferred alike. 

•	No, the split does not convert capital gains to dividends ... historically, its Class A (common) distributions have been mostly capital gain ... although it would have been rather clever of them if they had found a way to convert them, because .... 

•	No, capital gains from option sales are not “best-tax-treatment” for the majority of the population ... for that cohort, “best-tax-treatment” usually comes in the form of dividends, with capital gains coming in “somewhat-less-tax-favoured”. (This assumes, of course, that the units are held in a non-reg account, since for most people, the most tax-favoured would be any form of income held within either an RRSP or a TFSA) 

•	No, there is no ponzi-type use of newly subscribed monies to benefit previously subscribed holders ... secondary share offerings (there have been several over the years, with another currently in progress) increase the capital of the corporation, thus increasing the portfolio, the dividend income stream, and the capacity to generate option premiums. Sure they erode capital from time to time to maintain their distribution policy. So does virtually every dividend paying corporation in Canada. That doesn’t make them ponzi schemes. 

I could go on, but these are the key points. The descriptions given upthread badly misrepresent reality, particularly the ridiculous claim that they are offering a combined yield of over 15%.


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> what a slanderous outburst from cardhu. There's nothing fictional or misconceived or short on facts whatsoever about my post on DFN.
> 
> the "bad math" is cardhu's own math. The managers are offering, not the 8% that cardhu says, but a combined yield of 15.26% from one underlying stock portfolio, according to the latest from the toronto stock exchange & from thomson reuters.
> 
> ...


Whoa, Nelly!! You might want to cut down on caffeine or whatever's bothering you.
*grin*


Cardu disagreed but I didn't see any slander.

In any case, starting with math - assuming you are referring to the current prospectus for new shares, the portfolio is yielding 6.9% across the combination of preferred and capital shares ($1.725 per $25 invested, which is
$0.04375 per preferred issued at $10 and $0.10 per capital share issued at $15). Note that preferred to capital shares are issued on a 1:1 basis, with no fractional shares.

Also - the prospectus says "Preferred Shares are (a) to provide holders of 
the Preferred Shares with fixed cumulative preferential monthly cash dividends in the amount of $0.04375 per Preferred Share". 

I'm not sure what you mean by "real dividends" but this is likely not the total dividends the portfolio generates - especially for the shares held for a long time (see the comment later).

For the common shares, "Holders of the Class A Shares will also be entitled to receive, on the Termination Date, the balance, if any, of the value of the Portfolio remaining after returning the original issue price to the holders of the Preferred Shares and Class A Shares."

So yes, the common shares *will* participate in both the growth in dividends and the capital gains of the overall portfolio. The main requirement is that the portfolio has to have grown beyond the original $25 - which shouldn't be too hard if the selection criteria is a basket of blue chip stocks.

Continuing with the prospectus " Dividends on the Class A Shares are expected to be primarily funded from dividends received on the shares in the Portfolio and from cash realized by the Company from its covered call writing activities."

Note that options will generate income but are not required to be the major source. I see this as similar to other mutual funds which write options to generate income.

In addition, the high yield of the capital shares may not use risky option strategies. I see a lot of other strategies that the manager will have
working for them.

Consider that the portfolio has existed since 2004 and has a lot of blue chip stocks. When dividends are increased - the split corporation dividends likely haven't (I'll have to find the original prospectus to confirm). This means there's more dividends coming in than required to be paid out. Splits will also boost the yield *well* over the original yield - providing more maneuvering room. As long as the offering does not exceed the long term growth in yield, there isn't much need for the high risk options.

Then too, if the manager picked up some options in 2009 at half today's prices, the yield will be boosted. 

Bottom line is that the split share structure is way to focus either on dividends or capital gains, in a leveraged way. I wouldn't make it the bread and butter of my portfolio but a bit of money leveraged in the right direction can have great returns. 

Example, when TransCanada Pipe was at $10, had I known about the split share corporation for TCP, I could have bought the worthless capital shares for $1, with four years left to run. Two years later, TCP was at $22 while the split was trading at $7 (leverage on the way up - good, leverage on the way down, bad).

Here's some links for split shares corporations:
http://en.wikipedia.org/wiki/Split_share_corporation
http://www.tmxmoney.com/en/sector_profiles/structured_products/split_share.html

Cheers


*** Update: I found the original long form prospectus on www.sedar.com.
The preferred and capital dividend rates are the same. So, for
portfolio stocks held a long time, yield boosts will fund more
and more of the split share dividends (i.e. split share payout is
constant but the portfolio dividends collected are growing).


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> leph there is an earlier thread on dividend 15. Stock is to avoid.
> 
> structure is to legally separate the beneficiaries, ie the unit holders, into two separate funds.
> 
> ...


*shrug* - if you want to avoid it, feel free to do so. As you'll see later, I'm happy with it. 

As for the structure - including what the preferred versus capital share owners own, please see my other post that refers to the prospectus. Your description and the prospectus don't match.


Yes, in a severe downturn like 2009, the leverage in the capital (or common) shares will be downward. But the point of the capital share is to be leveraged. I wanted the leverage to accelerate the gain. I think it worked as when I look at BNS, as an example, it's up approximately 100% while in the same time frame, DF is up 300%.

The part that is unusual for me is that where I'd usually sell and move into the common shares or another investment, it's hard to part with a 31.5% payout that has already paid back 50% of my cost.

I've also seen split capital shares that were worthless, based on net asset value, trading for $1. Just like any other stock, the trades that go through are what people are paying - not necessarily the asset value. When management's plans worked out and underlying stock recovered, the NAV changed the worthless capital share to being worth $6. 

As mentioned in my other post, the options trading is not likely the main activity. I also suspect they use the same options trading experts or system that most other mutual funds use - so I'm not sure any special expertise is required.


Cheers


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## Eclectic12 (Oct 20, 2010)

Lephturn said:


> Thanks for the details.
> 
> Yeah, I started digging into Dividend 15 and it's pretty crazy. I would love to find something that buys top dividend growth stocks and runs options strategies on them and just pumps out that income - 10% or whatever they can get out of it. Without all the other splitting and crap that particular fund does. The Div15 guys do the basics that I'm looking for - but then they carve it all up and do a bunch of crazy stuff that I don't want anything to do with.
> 
> Otherwise it's down to me doing it myself, but my transaction costs will eat more of it than it otherwise might in a big fund. I'd love to find something that does the nice conservative part in a fund without the shady ponzi nature of it or the weird splitting those guys do.


*grin* - I'd agree Dividend 15 would be terrible for options strategy. However, the options part, like other mutual funds, is likely a small part of the overall business. (See my other posts with updates on the structure plus the options trading.)

Note too, the "weird" splitting is a feature by design that comes from the split share structure - just like some look for a multi-year GIC to have an interest rates that increases each year. 

In a nutshell, the aim of the split structure is to allow focus on either dividends or capital growth. I've heard of a few who have noticed a difference in trading amounts versus portfolio value to setup an arbitrage play but it's pretty rare.

I haven't heard of any mutual funds that do what you want but if there's enough demand, someone will create it!


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## andrewf (Mar 1, 2010)

I'd be careful throwing around the word 'ponzi' here. You're exposing yourself to libel litigation, quite legitimately. Risky or not, there is nothing improper about the operations of split corps in general.


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## Eclectic12 (Oct 20, 2010)

@humble_pie:

Re: Concerns about dividend 15 being able to afford paying the 
dividends without using high risk options trading.

I posted a lot of details and missed highlighting the key factors.

IMHO, the key factors to figuring out if the dividends can be funded or not is to figure out what was paid for the portfolio and what sort of trading/redemptions has happened since. 

Using the 2004 Long form prospectus, the cash in for selling 1 preferred and 1 capital share sold was $23.80 net. The question is what did the manager pay for the portfolio and how much of the dividends cover the combined payout of 6.9%? 

What the preferred and capital shares trade for is irrelevant as the portfolio has already been purchased. 

Once the portfolio is in place, time will be on the manager's side as the increase to the portfolio dividends will fund more of the static preferred/capital shared dividends.

The main risks is if a dividend to a portfolio stock is cut drastically, before increases in dividends or splits adding to the dividend income.


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## andrewf (Mar 1, 2010)

I'm think the prefs are not a bad deal, actually. I'd say they're pretty low risk and are providing a healthy 4.4%-ish yield to maturity in 4 years, in tax-advantaged dividend income. Many people are down on prefs because many have very long durations, but the duration here is pretty short.


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## humble_pie (Jun 7, 2009)

andrewf what are you thinking of launching an ugly libel threat that is baseless and without merit.

the word ponzi and the expression ponzi scheme are frequently used by journalists the world over to describe operations in which new incoming money is utilized to fund older undertakings or promises which such businesses cannot afford to meet on their own merits. Ponzi is a household word. Lingua franca. It is not libellous to use such terms when the circumstances are true.

in the case of dividend15, the company clearly states in its current prospectus* that its current share offering of 63.8 million dollars will be used to help pay the promised future dividends.

i've already mentioned that the $1.20 common class A share dividend yielding more than 10% is too high to be sustained by option trading alone. Experience tells me that a prudent and well-managed option strategy based on an underlying portfolio of high quality dividend-paying canadian common stock would yield roughly 3-5% per annum in option premiums. This is roughly what dividend15 should be paying out on the common shares imho.

a 3-5% return would be in addition to the dividend yield of roughly 5% that should largely support the preferred dividend payout. A sound and reasonable option trading return of 3-5% is likely to be sustainable until the termination date of dividend15 without requiring new share issues, which is how company has been funding its artificially high payouts. Same option return of 3-5% would not include capital gains from any of the stocks held in the underlying portfolio. This return is far below the ludicrous 10% dividend that company pays out on its common shares. Clearly, that $1.20 dividend is being augmented by other means.

it is true that an aggressive option strategy could generate a significantly higher yield, but it would also put the underlying portfolio at considerable risk, something the fund should not do as it is structured to pay back the preferred and the class B beneficiaries in full on the termination date. The class A common beneficiaries will be repaid with remaining proceeds of liquidation "if any," according to the current prospectus.

not surprisingly, the company admits* that it is presently seeking to raise $63.8 million in a new share issue in order to help support that dividend and retain the underlying portfolio of stocks.

* from the current prospectus page 7:

*Investment Objectives and Strategy*

_The Company’s investment objectives with respect to the Preferred Shares are (a) to provide holders of the Preferred Shares with fixed cumulative preferential monthly cash dividends in the amount of $0.04375 per Preferred Share; and (b) on or about the Termination Date (as defined below), to pay
holders of the Preferred Shares $10.00 per Preferred Share, which was the issue price thereof on the initial public offering of the Company, through the redemption of each Preferred Share held on the Termination Date. Based on current market conditions, dividends payable to holders of the Preferred Shares are expected to be funded entirely from dividends received on the shares in the Portfolio (as defined below).

The Company’s investment objectives with respect to the Class A Shares are (a) to provide holders of Class A Shares with regular monthly cash dividends targeted to be $0.10 per Class A Share; and (b) on or about the Termination Date, to pay holders of Class A Shares $15.00 per Class A Share, which was the issue price thereof on the initial public offering of the Company, through the redemption of each Class A Share held on the Termination Date. Holders of the Class A Shares will also be entitled to receive, on the Termination Date, the balance, if any, of the value of the Portfolio remaining after returning the original issue price to the holders of the Preferred Shares and Class A Shares. Dividends on the Class A Shares are expected to be primarily funded from dividends received on the shares in the Portfolio and from cash
realized by the Company from its covered call writing activities._

* from the current prospectus page 13:

*USE OF PROCEEDS*

_The Company intends to use the net proceeds of the Offering for investment purposes as described under “The Company – Investment Objectives and Strategy” above._

it is true that the company's more-than-opaque news releases about the offer contradict the above-referenced statements from the prospectus itself. However, it is the prospectus that is binding upon the company.


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## Eclectic12 (Oct 20, 2010)

@humble_pie:

Re: andrewf what are you thinking of launching an ugly libel threat that is baseless and without merit.

The way I read his post, he - like others, are not convinced the dividends from the portfolio can't pay for *all* of the dividends promised to the preferred and capital share holders. 

If the portfolio dividends are sufficient, then libel is a possibility.
(Though I'm not sure that any officials from the company are worried 
about our posts ... *grin*)


Re: It is not libellous to use such terms when the circumstances are true.

But that is the question - is it true?

The crux of the matter is that you seem to see options trading as the only way to pay for the capital share dividends. Meanwhile the prospectus clearly states that the investment portfolio is intended to provide this income.

Then too, if some of the shares have been held a long time, the increase in yield is going to provide more income than buying the same portfolio today.

From the various reports, just considering BMO, the lowest number held is something like 168,000 shares. If BMO has been held this long, the BMO stock is now doubled it's payout ($0.70 instead of $0.35). BNS done similar and depending on the timing, may have qualified for a 2:1 stock split. 

Meanwhile, the number of units for the Dividend 15 units appears to have grown from 8.4 million to 11.2 million.

So for at least two stocks in the investment portfolio, the payout has doubled but the promised payout has gone up by approximately a third.


Re: I've already mentioned that the $1.20 common class A share dividend yielding more than 10% is too high to be sustained by option trading alone. 

Agreed for options trading ... but the key question how much dividend income is the investment portfolio providing. 


Re: Sound and reasonable option trading return of 3-5% is far below the ludicrous 10% dividend that company pays out on its common shares. Clearly, that $1.20 dividend is being augmented by other means.

Note that I paraphrased several comments into one - so feel free to correct me if I've mis-representing what you are saying.

It depends on what was paid for the original portfolio and how adept the portfolio manager has been. It's like my investment in BNS. Based on today's close, you can say it's impossible to have a 6.5% yield but since I *paid* less than half of today's price, I do.

Since over sixty percent of the shares have existed since 2004, there is the potential that sixty percent of the portfolio has been held for nine years of increasing dividends and stock splits.


Re: not surprisingly, the company admits* that it is presently seeking to raise $63.8 million in a new share issue in order to help support that dividend and retain the underlying portfolio of stocks.

I'll re-read it when I have more time. I don't see from what I've read or what you've quoted say anything other than "the proceeds will be invested in an investment portfolio to fund the payout". 

If you have a direct quote, I'm interested but the quote so far says the investment portfolio is the main source - not options trading.

Cheers


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## cardhu (May 26, 2009)

Eclectic12 said:


> ... starting with math - assuming you are referring to the current prospectus for new shares, the portfolio is yielding 6.9% across the combination of preferred and capital shares ($1.725 per $25 invested.


The current prospectus prices the Class A shares at $12, not $15 ... so the combined offering is $22, not $25 ... the recent offering yield is 7.84%. 



> _for portfolio stocks held a long time, yield boosts will fund more and more of the split share dividends (i.e. split share payout is constant but the portfolio dividends collected are growing). _


True, and they did have a good run of dividend increases in the first few years ... but dividend cuts have the opposite effect. 



> _I'm not sure what you mean by "real dividends" but this is likely not the total dividends the portfolio generates._


Our fellow member misconceives that the preferred shares absorb all of the dividend income stream generated by the underlying portfolio ... that’s rubbish, of course ... the portfolio need only generate a 2.67% dividend yield (based on most recent NAV), to cover the preferred distributions ... that’s a pretty easy target, and one that they’ve never missed ... in every year of their existence they’ve taken in more dividend income than required for the preferred distributions ... at present, the average yield of the companies that make up their portfolio is 4.27%, so they’re only paying something like (depending on the weightings of the various holdings in their portfolio) 63 cents to the preferred unit-holders, out of every dollar of dividend income they take in. 

In past years, the preferred distributions required as little as 54 cents out of every dollar of dividend income they took in, but in the wake of the financial crisis, that ratio has suffered a little. 



> _the high yield of the capital shares may not use risky option strategies. _


They don’t need to use aggressive, high risk strategies at all ... even haughty-pie claims (sans evidence, mind you) that a 10% annual return is no big thing ... this fund’s original stated goal of 7.08% was rather conservative by comparison ... the more recent stated distribution goal is higher, at 7.84%, because the offering price is lower ... it is difficult to imagine how 10% could be “easy”, when 7.8% allegedly requires “aggressive, high-risk strategies”. 



> _Splits will also boost the yield well over the original yield - providing more maneuvering room. _


Stock-splits have no effect on yield. 



> _Then too, if the manager picked up some options in 2009 at half today's prices, the yield will be boosted. _


The manager sells options, he doesn’t buy them (except, perhaps, to close a position). 



> _the common shares will participate in ....the capital gains of the overall portfolio. The main requirement is that the portfolio has to have grown beyond the original $25 - which shouldn't be too hard if the selection criteria is a basket of blue chip stocks. _


Well, they started out at $25 but they’re below $20 now, and a few of their holdings have recently hit all-time record high share prices ... they’ll have a challenge just getting back to $25, let alone getting beyond it ... part of the reason is capital erosion ... from time to time, they’ve had to erode capital in order to maintain the distribution policy ... that’s not necessarily a problem, investors receive a higher than normal cash flow from distributions, in exchange for the possibility/likelihood of capital erosion ... at the end of the day, it is the aggregate rate of return, and tax-efficiency, that matters ... capital erosion is an acceptable part of that formula, as long as it doesn’t become the dominant part.

And in this case it hasn’t ... at inception, these people were “hawking” a return of 7.08%, from distributions alone with no promise of any capital growth whatsoever ... investors who got in at inception would, if they had sold immediately prior to the recent secondary issue announcement, have enjoyed an actual average annual return of 7.55% ... as it happens, though, the managers set the price for the secondary issue below market and that news brought the market price down a little closer to earth, and an original investor selling today would have an actual average return of only 6.95%, despite all of the capital erosion that has taken place. 



> _the number of units for the Dividend 15 units appears to have grown from 8.4 million to 11.2 million. _


To more than 13.6 million, actually ... the number of units grew through various secondary issues and reinvested distributions .... as it will grow again when the current offering is completed ... and every time the number of units increases, both the underlying portfolio and its income generating capacity also increase. The only real dilutive effect is the cost of the underwriting ... the fact that the new issue is being offered at a premium to NAV somewhat offsets those costs of underwriting. 



> _It's like my investment in BNS. Based on today's close, you can say it's impossible to have a 6.5% yield but since I paid less than half of today's price, I do. _


Not the same thing ... your investment in BNS is yielding exactly the same as anyone else’s investment in BNS, regardless of when it was purchased ... the relevant point though, as you have correctly pointed out, is that the dividends flowing into the fund have grown, while the distributions flowing out of the fund have not. 

At inception, there was more than enough dividend income to cover the preferred distributions, with some left over for the Class A shares ... the benefit of any dividend increases since then went exclusively to the Class A unit holders ... the preferred holders didn’t benefit at all from such dividend increases, except to the extent of a slight improvement in their margin of safety.


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## cardhu (May 26, 2009)

haughty-pie said:


> in the case of dividend15, the company clearly states in its current prospectus* that its current share offering of 63.8 million dollars will be used to help pay the promised future dividends.


Rubbish ... it says no such thing, you are clearly misinterpreting what the prospectus says ... it clearly states that the proceeds of the current offering will be used to invest “primarily in a portfolio of dividend-yielding common shares which will include ... 15 Canadian companies ... currently among the highest dividend-yielding stocks in the S&P/TSX 60 Index” ... 

If anything, the current issue might be considered an “anti-ponzi” ... new subscribers benefiting at the expense of existing subscribers (not what any _competent _journalist the world over would view as a ponzi) ... the announcement of the new issue knocked more than a dollar off the market value of the combined units, by offering the new units at a discount to market ... though that effect is offset somewhat by the very slight improvement in NAV. 



> _the $1.20 common class A share dividend yielding more than 10% is too high to be sustained by option trading alone. _


I’ve already explained that the Class A distribution does not need to be sustained by option trading alone. 



> _Experience tells me that a prudent and well-managed option strategy based on an underlying portfolio of high quality dividend-paying canadian common stock would yield roughly 3-5%_


Yes, but experience also seems to be telling you that the combined yield on this issue is north of 15%, which any rational person can see it is not. 

But lets assume that your estimate of option trading income is reasonable ... so the portfolio generates a stream of dividend income of about 4.25% (see above) and a stream of option premiums of about 3 -5%, for a total income to the company of something in the range of 7.25 -9.25% ... and since their promised distributions are only 8.67% of NAV , they would seem to have set their structure just about right. 



> _3-5% per annum ... is roughly what dividend15 should be paying out on the common shares imho_


If they only distributed 3-5%, they’d have to pay tax on all the undistributed option premiums and dividends left inside the fund ... mutual fund corporations are structured to distribute taxable income to the unitholders, so they CAN’T ratchet down the distributions that far.


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## I'm Howard (Oct 13, 2010)

I am revisiting all my Dividend Stocks as as well as CDZ and XDV as the flight to safety has reduced yields and it might be time to take profits and sit in Treasuries for awhile?

I will still hold BCE, PFE, and TRP.


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> I'm think the prefs are not a bad deal, actually. I'd say they're pretty low risk and are providing a healthy 4.4%-ish yield to maturity in 4 years, in tax-advantaged dividend income. Many people are down on prefs because many have very long durations, but the duration here is pretty short.


Yes, it is.

Up until now I've either not had spare cash or have been looking to use the leverage on the capital share side.

This is a good reminder as I've currently have some cash that could benefit from this.

As for people being down on prefs due to the duration, can you elaborate a bit? 

The few people who I've talked to who were looking at prefs were down on them due to paying a premium, being harder to get ahold of or the possibility of the pref being called - requiring a move of the money elsewhere at short notice.

As for the short run for the split shares, I'm now curious to see whether in 2009, the vote was to extend them or whether it was a full wind-up - following by a new offering.

I've noticed that some of the splits I've used, kept going beyond the windup date.

Cheers


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## Eclectic12 (Oct 20, 2010)

@cardhu:

Re:The current prospectus prices the Class A shares at $12, not $15 ... so the combined offering is $22, not $25 ... the recent offering yield is 7.84%. 

Hmmm ... I must have had the original prospectus number stuck in mind.
Oh well, thanks for the correction.


Re: True, and they did have a good run of dividend increases in the first few years ... but dividend cuts have the opposite effect. 

Yes - dividend cuts would have the opposite effect. However, in absence of a complete list of the stocks traded, I can only use what's in the reports I've looked at. Most of the stocks listed I recognise as not having dividend cuts. Of the potential ones that may have cut, Manulife and Thompson Reuters is a for sure cut but that seems to be it. Of course the other relevant question is whether Manulife / Thompson Reuters were added after the dividend cut or whether they have been part of the portfolio for a while.


Re: Our fellow member misconceives that the preferred shares absorb all of the dividend income stream generated by the underlying portfolio ... that’s rubbish, of course ... the portfolio need only generate a 2.67% dividend yield (based on most recent NAV), to cover the preferred distributions ... 

Thanks for the clear description, which is more detailed but along the same lines as I was thinking.

I'm also wondering what % have been held continuously and are potentially paying more than their original share of the dividends. Again without a detailed list of the buy/sells, it's hard to tell but as mentioned in a previous post, there potential of approximately 168K of BMO having doubled their dividends.



Re: They don’t need to use aggressive, high risk strategies at all ... even haughty-pie claims (sans evidence, mind you) that a 10% annual return is no big thing ... this fund’s original stated goal of 7.08% was rather conservative by comparison ... the more recent stated distribution goal is higher, at 7.84%, because the offering price is lower ... 

True ... plus if there are any stocks held long term which have raised their dividends, then less pays more.


Re: Stock-splits have no effect on yield. 

Poor choice of words on my part. What I was trying to say was that a 2:1 stock split, where the dividend is held constant will double the income. 


Re: The manager sells options, he doesn’t buy them (except, perhaps, to close a position). 

Hmmm ... that seems odd to me. If the mutual fund has contracted with the manager to offer the prospectus, why wouldn't the manager use options to set his going-in price? If prices rise while all the paperwork is filed, approved, the TSX approves, etc. etc. all of which are delays, funding the distributions could be more difficult. It seems to me that buying a few options would help with that risk.


Re: To more than 13.6 million, actually ... the number of units grew through various secondary issues and reinvested distributions .... as it will grow again when the current offering is completed ... and every time the number of units increases, both the underlying portfolio and its income generating capacity also increase. 

I don't I think went to the lastest report so I can easily see where it could be different. 


Re: Not the same thing ... your investment in BNS is yielding exactly the same as anyone else’s investment in BNS, regardless of when it was purchased ... 

Hmmm ... maybe I'm using the wrong term then. Maybe I should be using Yield on Cost. In any case, the point is that one can look at the current yield and say that $55 is required to generate $1.96 income. In my case, I only needed $30 for the same income. 


Re: ... the relevant point though, as you have correctly pointed out, is that the dividends flowing into the fund have grown, while the distributions flowing out of the fund have not. 

Exactly ... the increased income should make it easier to be able to pay the distributions. 
Of course this assumes the portfolio isn't being turned over at a rapid pace. 


Re: At inception, there was more than enough dividend income to cover the preferred distributions, with some left over for the Class A shares ... the benefit of any dividend increases since then went exclusively to the Class A unit holders ... the preferred holders didn’t benefit at all from such dividend increases, except to the extent of a slight improvement in their margin of safety.

True ... however, once the Class A distributions are funded, any further increases are received by the mutual fund. The Class A share holders will see the increase in the annual report but won't have it in hand until the fund is wound up. So there is potentially cash-flow to assign to new shares, buy other investments etc. etc.


Which reminds me to check what happened when the fund was extended in 2009.

Cheers


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## cardhu (May 26, 2009)

The shareholders voted to extend. 

I assume what andrew meant by duration was that most new pref issues these days are perpetual. Split prefs are among the few that have defined maturities, although those maturities can be extended by mutual consent. 

The fund’s dividend income fell in ’09 ... you don’t need a detailed history of stock trades to see that ... whether it was due to dividend cuts or to trades that replaced higher-yielding shares with lower yielding shares is immaterial ... my point was that referring only to dividend increases is telling only half the story ... dividend decreases can and do happen, and have the opposite effect of dividend increases ... Class A shareholders are the exclusive beneficiaries of any dividend increases that may occur, but they also take the brunt of dividend decreases. 

It makes no difference how long the fund has continuously held the shares. The yield that matters today is today’s yield. Yield on Cost is a meaningless metric. 

Stock splits and dividend increases are two separate things. I suppose it is possible for a company to decide to do both of these things on the same day, but I’m not aware of it ever having happened. Are you? And if it ever did happen, the dividend increase would be the only part that benefits the Class A DFN holders ... the split would be of no consequence. 

Whose money would the manager use to buy options to set his going-in price? He can’t use the existing investor’s money unless he gets approval from them to amend the investment objectives. None of the various prospectii mentioned anything about speculative option trading. 

Unless the termination date gets extended a few more times, its not likely the dividend income will grow sufficiently to fully fund the Class A distributions ... that’s the reason they use covered calls to supplement dividend income ... but if the dividend stream did grow that much, the investors wouldn’t need to look in the annual report to see the increase, they’d have it in hand and they’d see it on their tax returns every year ... the fund would have no choice but to distribute it.


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## Eclectic12 (Oct 20, 2010)

@cardu:

Re: The shareholders voted to extend.

That's what I thought I saw when looking for other details. I was interested in whether the portfolio was sold in 2009.


Re: I assume what andrew meant by duration was that most new pref issues these days are perpetual. Split prefs are among the few that have defined maturities, although those maturities can be extended by mutual consent. 

Hmmm ... I'm more of a common/capital split share type so it all sounds good to me. *grin*


Re: The fund’s dividend income fell in ’09 ... you don’t need a detailed history of stock trades to see that ... whether it was due to dividend cuts or to trades that replaced higher-yielding shares with lower yielding shares is immaterial ... 

I'm leaning to trades as most of the fifteen listed have been increasing dividends. 


Re ... my point was that referring only to dividend increases is telling only half the story ... dividend decreases can and do happen, and have the opposite effect of dividend increases ... Class A shareholders are the exclusive beneficiaries of any dividend increases that may occur, but they also take the brunt of dividend decreases. 

Agreed ... though cuts should be in the minority based on the fifteen companies quoted. Also keep in mind that my intent was to show that options trading is not the only potential source of the Class A dividends. 


Re: ... It makes no difference how long the fund has continuously held the shares. The yield that matters today is today’s yield. Yield on Cost is a meaningless metric. 

So you don't see a benefit in twice the income from the same company that some of the new money is going to be invested in? With a static payout, I'd think the extra income would make the manager's life easier. 


Re: Stock splits and dividend increases are two separate things. I suppose it is possible for a company to decide to do both of these things on the same day, but I’m not aware of it ever having happened. Are you? 

Not that I've noticed - however the Google chart for BNS shows a dividend Jan 2, 2004 of 20 cents, followed by a 2:1 split on April 2nd, 2004 and the next dividend of July 2nd, 2004 of 30 cents. So it looks like it does happen, however rarely.  Interestingly, Yahoo shows dividends of 25 cents for Jan 2nd, another 25 cent dividend Apr 2nd + the split and July 2nd as 30 cents.

So I just checked RY which has a Jan 24, 2006 dividend of 32 cents, an Apr 7th, 2006 2:1 split and an Apr 21st, 2006 according Google. Yahoo shows Jan 24 dividend 27.75 cent, 2:1 split on Apr 7th and an Apr 21st divident of 31.8 cents.

Weird ... the RY is recent enough that if I decide to hunt them down, the documents should still be readily available.


Re ... And if it ever did happen, the dividend increase would be the only part that benefits the Class A DFN holders ... the split would be of no consequence. 

Agreed - until the post-split shares climb in value. This capital gain, while irrelevant to the payouts would benefit the Class A DFN holders. However, returning to the "options trading is the only way to pay", increased income should make the target payments easier to achieve.


Re: Whose money would the manager use to buy options to set his going-in price? He can’t use the existing investor’s money unless he gets approval from them to amend the investment objectives. None of the various prospectii mentioned anything about speculative option trading. 

True ... though I also wonder how the executives who negotiated the terms published in the original draft prospectus and in theory, made sure that the whole setup would work were paid. I suppose they could have taken a risk of being paid later.


Re: Unless the termination date gets extended a few more times, its not likely the dividend income will grow sufficiently to fully fund the Class A distributions ... that’s the reason they use covered calls to supplement dividend income ... 

Agreed.


Re ... but if the dividend stream did grow that much, the investors wouldn’t need to look in the annual report to see the increase, they’d have it in hand and they’d see it on their tax returns every year ... the fund would have no choice but to distribute it.

Hmmm ... my understanding may not be correct but I thought it was at the discretion of the management team, similar to the decision to increase dividends for a share company. 

Or is there a special requirement for mutual funds?


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## dogleg (Feb 5, 2010)

I'm Howard : In your post three or four days ago you mentioned you will 'hang on' to PFE. Maybe you could elaborate on your reasons. I don't know how long you have held this stock but I have owned it for some years to my regret. Thanks.


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## gemma119 (Apr 6, 2009)

*Perplexed?*

Can anyone explain to me what happened to CDZ yesterday when the market went up over 1%, CDZ lost.19%?


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## humble_pie (Jun 7, 2009)

cardhu you are making a fool of yourself.

you've created a false sentence by pasting together your own confused fiction with a few words taken out of several sentences in the introduction to the prospectus that describe the company's core business, which is investing in 15 dividend-paying companies. Nowhere in the prospectus do these words say or even imply that funds raised from the recent share offering will be used to augment this business operation.

on the contrary, the prospectus clearly states on pages 7 and 13 that funds raised in the recent share offering will be entirely used to fulfill its investment objectives, which it defines as payment of the promised dividends and reimbursement of the shareholders on the termination date.

i posted the actual text extracts from the prospectus pages 7 & 13 in my previous message. I'm not going to repeat. What part of these extracts are you not able to understand.

any journalist who would re-write and distort his sources so grotesquely would lose his job pronto.

merry christmas and happy new year to you, cardhu. You have inherited the title previously held by the late lamented leslie. The board's resident Angry Bitter Old Man. You can reply with your trademark insults & "rubbish" if you wish, but since you never have anything of value to say i for one am going to ignore you totally.


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## cardhu (May 26, 2009)

Well, good morning to you, too. 

Insults and bitterness?? Those are more up your alley than mine, as many long-time members of this forum can attest. Unlike yourself, I have not resorted to insults and personal attack to bolster my argument. I prefer to rely on facts, math & logic. 

The press release of Dec 21 confirms what is written in the prospectus ... 



> _“The proceeds from the secondary offering of the Company, net of expenses and the Agents’ fee, will be used by the Company to invest in an actively managed portfolio of dividend-yielding common shares ... “_


It is you, "humble", who are making a fool of yourself.


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