# Dividend Growth Split Corp DGS and DGS.PR.A



## gibor365 (Apr 1, 2011)

I was searching for DGS (emerging market ETF) and by accident came accross Dividend Growth Split Corp that traded on TSX: DGS and DGS.PR.A
Could somebody please to explain me how those equities work? How they pay 12% and 5.5% dividends yield respectedly? Also their distribution in $ didn't change for years...
What are the risks of such equites?


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## Longwinston (Oct 20, 2013)

I came across those as well Gibor. I have a screen that I must understand the business I am investing in plain English. These investments don't pass that screen.


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## liquidfinance (Jan 28, 2011)

I stay clear of these as well. Not a sound investment in the long run IMO.


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## liquidfinance (Jan 28, 2011)

This was on a Scotiamcleod report

http://beltramewealthmanagement.com/wp-content/uploads/2013/02/2013-Guide-to-Preferred-Shares.pdf

Dividend Grow th Split 5.25% DGS.PR.A Pfd-3 (non investment grade) N/A $10.27 $0.525 Retraction Date 30-Nov-14 10.00 4.08% 40.72% (downside protection)



> Split preferred shares are synthetic preferred shares that are based on an underlying
> portfolio of common shares or on a portfolio created from more diverse or complex financial
> instruments, including derivatives. In the most basic split preferred share the underlying portfolio
> allocates any capital appreciation to a capital share and all dividend income to a dividend
> ...


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## gibor365 (Apr 1, 2011)

Longwinston said:


> I came across those as well Gibor. I have a screen that I must understand the business I am investing in plain English. These investments don't pass that screen.


This is why I'm asking if anyone can explain in simple English  
On their website :_Equal weight blue-chip portfolio of Canadian equities included in the S&P/TSX Composite Index which have high dividend growth rates_

I just don't get how they manage to pay 12% yield for years


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## webber22 (Mar 6, 2011)

I took a look at DGS, the distributions since 2008 have all been return of capital. 
The real yield would be around 3%, but this is juiced up by them giving you your capital back. 
So they are basically returning capital, collecting .60% mer, then continually issuing shares to continue the ponzi like scheme. 
You're better offer to buy the 20 stocks yourself or hold an index fund.


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## gibor365 (Apr 1, 2011)

webber22 said:


> I took a look at DGS, the distributions since 2008 have all been return of capital.
> The real yield would be around 3%, but this is juiced up by them giving you your capital back.
> So they are basically returning capital, collecting .60% mer, then continually issuing shares to continue the ponzi like scheme.
> You're better offer to buy the 20 stocks yourself or hold an index fund.


"the ponzi like scheme" - this is exactly what I was thinking when notices this equity 
As if 12% yield is result of ROC payments, there is no other way this stock has stable price and distributions


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## andrewf (Mar 1, 2010)

The total return is real, the yield is illusory. This is why yield is irrelevant and you shouldn't purchase securities on the basis of yield.

This is not a ponzi. Old investors are not paid using the investments of new investors. The yield is returning part of the NAV to you, not someone else's capital. You should be careful when tossing around the word ponzi. It tends to make companies feel particularly litigious.


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## GoldStone (Mar 6, 2011)

Split Corp? For me, it's a split second decision to toss it in the TOO HARD pile.

Notice the TOO HARD file on Buffett's desk. There is no shame in admitting that some investments are too hard to bother with.


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## Canuck (Mar 13, 2012)

I don't know, Dividend 15 split Corp looks pretty interesting, maybe a nice TFSA holding

http://www.dividend15.com/fund_info.html


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## GoldStone (Mar 6, 2011)

Canuck said:


> I don't know, Dividend 15 split Corp looks pretty interesting


What is interesting about it?

It's just a basket of blue chips. Looks like a mini-version of XIU, except it's much more expensive. MER=0.65% + 20% performance bonus above 12% threshold.

What am I missing?


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## Canuck (Mar 13, 2012)

GoldStone said:


> What is interesting about it?
> 
> It's just a basket of blue chips. Looks like a mini-version of XIU, except it's much more expensive. MER=0.65% + 20% performance bonus above 12% threshold.
> 
> What am I missing?


holding great companies and paying 11% dividend. Realize it's ROC but looking at the chart that doesn't seem to be effecting the stock price. Holding in TFSA you don't have to worry about the accounting hassles or taxes from ROC income.


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## GoldStone (Mar 6, 2011)

You don't mind paying 0.65% + 20%? You can get pretty much the same thing for 0.18% (XIU).

11% is fiction. The underlying portfolio doesn't yield that much. You pay the MER to get your own money back.


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## Topo (Aug 31, 2019)

What is the exact role that split shares play in a portfolio?

Looking at DFN.PR.A (Dividend 15 Split Corp) for example, the portfolio consists of Canadian stocks that pay dividends. Most of the stocks have issued preferred shares too, so one could directly buy those and get an equivalent yield. The split share yields 5.11%. The price is 10.27, so there likely isn't much upside potential. The capital unit (DFN) is 8.99, so there is some downside protection for the prefs, but in a severe downturn, given the embedded leverage, there is a possibility of capital loss on the prefs. The covered calls that are sold could limit recovery, depending on how long it takes.

One possible application could be for an investor who would like to invest in non-Canadian stocks (eg US banks) and would prefer to receive eligible dividends (for example in a CCPC).

The capital units seem to be a pure leveraged play on the underlyings. One could use margin and options to the same end.


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## fireseeker (Jul 24, 2017)

Topo said:


> What is the exact role that split shares play in a portfolio?


Splits offer two advantages for investors: 
1) They normally can be redeemed for NAV at maturity, usually five years;
2) They represent some diversification over buying a pref or leveraging a common from, say, a single bank.

With regular pref prices being volatile, split preferreds can be an attractive, steadily priced substitute. (This assumes the underlying stock doesn't crater. Look at Oil Split Corp to see what can happen then.)

All that said, split shares are usually sold, not bought. They are lucrative for underwriters and for investment sales people.
Individual investors should tread carefully, IMO.


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## Topo (Aug 31, 2019)

fireseeker said:


> Splits offer two advantages for investors:
> 1) They normally can be redeemed for NAV at maturity, usually five years;
> 2) They represent some diversification over buying a pref or leveraging a common from, say, a single bank.
> 
> ...


I agree with #1. The retractibility feature would be advantageous for investors, making it more bond-like in a sense. It affords the investor the possibility of tapping into capital if needed. 

With regards to diversification, one could buy a portfolio of the underlying prefs or commons, which would be as well diversified as the split prefs. There may be an advantage in using the capital units as a leveraged play, given there is no possibility of a margin call and (possibly) the leverage turn out to be cheaper.

OSP is an interesting case. Now that the Class A shares are trading at $1.69, the preferred shares have little protection if the NAV drops further. Its rating of pfd-4(low) reflects that. 

Another case in point is FTU (US banks), which dropped from $30 to a few cents after the financial crisis. The pref, FTU.PR.A, dropped from $11 to $2, but kept paying dividends. Its successor (FTU.PR.B) is trading at $7.95 and yields 9.5%. The prefs seem to have made a small profit here, but not materially different than XLF (US financials ETF).


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## agent99 (Sep 11, 2013)

> Most of the stocks have issued preferred shares too, so one could directly buy those and get an equivalent yield. The split share yields 5.11%.


DFN holds the following stocks. Could you explain how an investor could obtain a 5.11% yield by buying preferred shares of these companies? And where would we find those preferreds? Certainly not from my on-line brokerage. And they should have 5 yr or less fixed maturity, just like the splits. Not rate-resets!

Bank of Montreal

Bank of Nova Scotia

BCE Inc.

CI Financial Corp.

CIBC

Enbridge Inc.

Manulife Financial

National Bank of Canada

Royal Bank

Sun Life Financial

TELUS Corporation

Thomson Reuters Corporation

Toronto-Dominion Bank

TransAlta Corporation

TC Energy Corporation


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## Topo (Aug 31, 2019)

agent99 said:


> DFN hold the following stocks. Could you explain how an investor could obtain a 5.11% yield by buying preferred shares of these companies? And where would we find those preferreds? Certainly not from my on-line brokerage. And they should have 5 yr or less fixed maturity, just like the splits.
> 
> Bank of Montreal
> 
> ...


It won't have a five year fixed maturity, but on average one could get a 5% yield directly using a mixture of perpetual, rate reset, and floating rates.

The five year maturity is a red herring. If you truly need the funds at five years, you shouldn't invest in split preferreds, because there is a chance that the NAV would be less than $10 at maturity. If you are going to keep investing, then the 5 year mark is irrelevant in my opinion.


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## agent99 (Sep 11, 2013)

Topo said:


> It won't have a five year fixed maturity, but on average one could get a 5% yield directly using a mixture of perpetual, rate reset, and floating rates.


You say you could get that 5%, but I doubt very much that you can. Look the yields up and post them. 

You also would have to make 15 trades. And they would be in high risk rate resets or perpetuals where your yield is locked in perpetually so again high risk of capital losses. That does not usually happen with splits. 

Split pfds are not preferred shares. They are just a way of splitting investors into two groups - those interested in capital gains and those interested in dividend income. From your statements, it might be just as well to go study the basics of split corporations and how they work. 

Some of us here have learned to totally avoid buying individual preferred shares.


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## dubmac (Jan 9, 2011)

I asked a similar question years ago on a similar product - here is the thread
https://www.canadianmoneyforum.com/...ssible-for-DFN-to-earn-10-yield?highlight=DFN
I wouldn't touch DFN or DGS


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## Topo (Aug 31, 2019)

agent99 said:


> Some of us here have learned to totally avoid buying individual preferred shares.


What is the reason for that?


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## fireseeker (Jul 24, 2017)

I could see using splits in a cash account, as part of a five-year ladder or as a conservative holding for a hunk of cash with no immediate need.
The after-tax return would be attractive. 
Of course, it should not be considered a risk-free investment. The investor should be comfortable with the idea that after five years s/he may only get back 80-90 cents on the dollar.


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## Topo (Aug 31, 2019)

dubmac said:


> I asked a similar question years ago on a similar product - here is the thread
> https://www.canadianmoneyforum.com/...ssible-for-DFN-to-earn-10-yield?highlight=DFN
> I wouldn't touch DFN or DGS


Very interesting thread indeed. My question was about split prefs in general (DFN being one example), but the thread had some good discussions. 

I would however point out that the dividend on DFN is totally irrelevant, because it directly comes out of the NAV. DFN.PR.A is different, as long as NAV of the entire unit is above %10. If below $10, yield on DFN.PR.A also becomes irrelevant.


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## agent99 (Sep 11, 2013)

Topo said:


> What is the reason for that?


There are others here who can answer that better than I can. Here is one good post I found from someone with experience in rate-resets: https://www.canadianmoneyforum.com/...red-choosing?p=2019308&viewfull=1#post2019308

In general, consensus here seems to be that preferreds are complex and there is a good chance of average investor getting burned. As a result, some buy pfd etfs lke ZPR & CPD and still get burned.


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## agent99 (Sep 11, 2013)

fireseeker said:


> Of course, it should not be considered a risk-free investment. The investor should be comfortable with the idea that after five years s/he may only get back 80-90 cents on the dollar.


That is very unlikely to happen. Most split corporations renew at the 5yr maturity date. DFN are about to do this. So if market price is lower than par, you can just hold and continue to collect dividends. If a split corporation like DFN decides to wind up operations, the preferred investors get paid first. The NAV of the underlying portfolio of 15 stocks would have to have dropped (now about $17.50) to below $10 for the preferreds not to receive PAR for their units. 

I consider the main risk with splits to be that of the management company. Quadravest in this case.


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## fireseeker (Jul 24, 2017)

agent99 said:


> That is very unlikely to happen.


I agree. 
However, it is important to note that the return of preferred capital -- although highly likely -- is not guaranteed. Casual investors should not assume it is a substitute for a GIC.


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## Topo (Aug 31, 2019)

fireseeker said:


> I agree.
> However, it is important to note that the return of preferred capital -- although highly likely -- is not guaranteed. Casual investors should not assume it is a substitute for a GIC.


You are correct. As an example, FTU.PR.B has been below par for a long time.


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## agent99 (Sep 11, 2013)

fireseeker said:


> I agree.
> However, it is important to note that the return of preferred capital -- although highly likely -- is not guaranteed. Casual investors should not assume it is a substitute for a GIC.


This is true - it is not GIC-like! In a way, it (at least DFN.PR.A) has an advantage over a bond in that it cannot be called when market value is low. I had that happen with at least one closed end fund. I also had it happen recently when BT (British Telecom) closed their ADR. Prices very low and we had to take our lumps


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## agent99 (Sep 11, 2013)

Topo said:


> You are correct. As an example, FTU.PR.B has been below par for a long time.


But anyone buying would only have to pay the current market value (below par). It is trading at $7.95 and has a yield of 9.5%. The market price is about the same as current NAV and that is what investor would get if fund was wound up. It has just been extended to 2024, so not likely to be wound up soon. The $10.00 notional issue price isn't really a factor. 

I don't buy much (anything?) in USA, but if they ever get their trade issues sorted out, there may be an opportunity for capital gains as well as high yield with this split pfd.


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## Topo (Aug 31, 2019)

agent99 said:


> But anyone buying would only have to pay the current market value (below par). It is trading at $7.95 and has a yield of 9.5%. The market price is about the same as current NAV and that is what investor would get if fund was wound up. It has just been extended to 2014, so not likely to be would up soon. The $10.00 notional issue price isn't really a factor.
> 
> I don't buy much (anything?) in USA, but if they ever get their trade issues sorted out, there may be an opportunity for capital gains as well as high yield with this one.


Those who bought at $11 (the original FTU.PR.A) in 2007 would have seen it go down to $2 and then gradually recover. They would have been underwater for years. 

For those who buy today, it will be a leveraged play on US financials, similar to what FTU was before the crash. The dividend at this stage is not relevant; it is the profit of the underlying activities that would determine the return going forward.


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## Eclectic12 (Oct 20, 2010)

Topo said:


> ... My question was about split prefs in general (DFN being one example), but the thread had some good discussions.
> I would however point out that the dividend on DFN is totally irrelevant, because it directly comes out of the NAV ...


??? ... as I understand it, the raison d'etre for split corps in the first place is to split the capital gains growth away from the income (and it's growth).

Those buying DFN for capital gains leverage likely would see any dividends paid as icing on the cake, should they be paid. Where it is paid, the dividends may end up being far from irrelevant to the total return.


Cheers


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## agent99 (Sep 11, 2013)

Eclectic12 said:


> ??? ... as I understand it, the raison d'etre for split corps in the first place is to split the capital gains growth away from the income (and it's growth).
> 
> Those buying DFN for capital gains leverage likely would see any dividends paid as icing on the cake, should they be paid. Where it is paid, the dividends may end up being far from irrelevant to the total return.
> 
> ...


You are right. I was going to post something similar, but decided it was not worthwhile wasting more time on this. 

For those who don't understand splits, James Hymas provided an explanation a while back. https://www.theglobeandmail.com/glo...-and-downs-of-doing-the-splits/article622696/


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## Topo (Aug 31, 2019)

Eclectic12 said:


> ??? ... as I understand it, the raison d'etre for split corps in the first place is to split the capital gains growth away from the income (and it's growth).
> 
> Those buying DFN for capital gains leverage likely would see any dividends paid as icing on the cake, should they be paid. Where it is paid, the dividends may end up being far from irrelevant to the total return.
> 
> ...


The dividends on the capital units comes directly out of the NAV. The returns on the underlying assets (if any) gets added to the NAV first and then gets paid out. Paying a dividend or not would not change that. 

There is no icing, it's just the cake.


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## Eclectic12 (Oct 20, 2010)

For DF instead of DFN - be it icing or cake ... the buy/sell trades when selling put the capital gain at about +230% in less than two years where the "irrelevant dividends" paid back 55% of the purchase price. 

For someone buying on the expectation of solely CG, the total return was better than expected.

I'll have to find the common stock bought at a similar time but IIRC, for companies in the mix - neither the CG nor the dividends nor the total return were to this level.



Cheers


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## agent99 (Sep 11, 2013)

Dividend Growth Split announced a redemption of their pfds in November. This to balance number of equity and pfds outstanding. Holder of pfds should have had 3.508% of their DGS.PR.A redeemed. https://finance.yahoo.com/news/dividend-growth-split-corp-announces-224642789.html
When I received the notice from BMOIL, I thought I had chosen the do nothing option - in other words allow the partial redemption. But today, I see that ALL our DGS pfds were redeemed! Something over $40k. 
Did anyone else receive the partial redemption?

I am not really unhappy about this (returned ~7.6% in 11 months) but don't recall choosing a total redemption or retraction option. But maybe I did?????


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## fireseeker (Jul 24, 2017)

agent99 said:


> Dividend Growth Split announced a redemption of their pfds in November. This to balance number of equity and pfds outstanding. Holder of pfds should have had 3.508% of their DGS.PR.A redeemed. https://finance.yahoo.com/news/dividend-growth-split-corp-announces-224642789.html
> When I received the notice from BMOIL, I thought I had chosen the do nothing option - in other words allow the partial redemption. But today, I see that ALL our DGS pfds were redeemed! Something over $40k.
> Did anyone else receive the partial redemption?
> 
> I am not really unhappy about this (returned ~7.6% in 11 months) but don't recall choosing a total redemption or retraction option. But maybe I did?????



I am 99% sure that BMOIL has made an error. My guess is that it will be caught and corrected.

The redemption was done on a pro-rata basis. There should have been no option to surrender all your preferred shares.
Remember, the whole point of this exercise was for DGS to equalize the number of capital and preferred shares. If some people surrender more than 3.508% equalization will be impossible.

I could be wrong about this; I have not read the official documents. But the press release is pretty clear:



> Each Preferred shareholder of record on November 28, 2019 will receive a redemption price of $10.13 per Preferred Share resulting in a reduction of 3.508% of each Preferred shareholders’ holdings.


I suggest you ask BMOIL for an explanation.


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## humble_pie (Jun 7, 2009)

fireseeker said:


> I am 99% sure that BMOIL has made an error. My guess is that it will be caught and corrected.




i wonder whether BMO can "correct" the error if their back office has made a mistake by over-redeeming. Most recipients of extra $$ from extra "redemptions" will have long since spent or committed or moved the proceeds by the time BMO might eventually get around to "correcting" the problem.

i'm posting because back office failures at BOMIL have, imho, reached significant levels. These are extremely sobering mistakes.

over the past year a cmffer has complained in this forum that BMO would not or could not pay out on thomson reuter's extraordinarily complicated multi-step reorg, although TD's back office paid everything immediately & with awesome accuracy.

when goldcorp canada merged with newmont USA in the spring of this year, BMO's "back office" would not pay out on the partial share cash distribution for five months, while TD paid promptly.

BMO representatives are taught to tell clients that "the company hasn't delivered" or "the company did this." But these excuses are not true, when one can see other brokers paying on time, keeping records perfectly up-to-date.

right now i am concerned by the fact that BMO's record-keeping, for at least some fixed income funds where clients are running DRIPs, does not show the amounts of such distributions on statements. The good part of this omission is that BMO is accurately re-investing an amount that does appear to be the correct distribution amount. The bad part is that the data is not formally delivered to the client, even though the broker is collecting a substantial trailer fee to hold such fund in a client's account (much as i hate to rub it in, the TD does accurately set forth distribution amounts on statements.)

talking to representatives at BMO does not help. The only way one could effect a change for the better would be to mount a complaint to the IIROC. This is no small matter & it will probably be easier for me to to just move the funds. But i am concerned by what may be yet another story about confusion & lax performance in the BOMIL back office.
.


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## agent99 (Sep 11, 2013)

fireseeker said:


> I am 99% sure that BMOIL has made an error. My guess is that it will be caught and corrected.


Right! The redemption/retraction has been cancelled. But so far the 3.508% redemption has not appeared.


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## Arby1 (Oct 28, 2018)

Yesterday I received my December dividend in my TDDI account, based on the wrong pre-retraction share count. Today, TDDI corrected the divided based on the post-retraction share count. The cash for the retracted shares hasn't showed up in my account as of today.


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## agent99 (Sep 11, 2013)

agent99 said:


> Right! The redemption/retraction has been cancelled.* But so far the 3.508% redemption has not appeared*.


Corrected amount appeared today. Left with odd numbers of units  

Interesting that TDDI had same problem, so cause of errors must have been elsewhere.


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## humble_pie (Jun 7, 2009)

agent99 said:


> Interesting that TDDI had same problem, so cause of errors must have been elsewhere.



but according to the post above the TD situation was not comparable. It was only one dividend, whereas the BMO error, as you have described it, was to redeem entire holdings.

over the years other BMO back office errors have been described in this forum. In fact, the large topic of broker FX fees on canadian dividends paid in US dollars was launched in cmf forum by a BMO error back in 2012. A cmffer asked why his Encana dividend had been paid into his BMO account, then error-corrected out, then eventually injected back into his account but in a different amount.

the two critical arms of broker services are trade execution & accurate record maintenance. What i find is that BMO is excellent at trade execution but alas they are lax in record maintenance.


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## Arby1 (Oct 28, 2018)

*t*



Arby1 said:


> Yesterday I received my December dividend in my TDDI account, based on the wrong pre-retraction share count. Today, TDDI corrected the divided based on the post-retraction share count. The cash for the retracted shares hasn't showed up in my account as of today.


The cash for the 3.5% retracted shares has now appeared in my TDDI account, backdated to Dec 13.


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## agent99 (Sep 11, 2013)

Arby1 said:


> The cash for the 3.5% retracted shares has now appeared in my TDDI account, backdated to Dec 13.


In my BMOIL account, it looks like the last dividend was still based on the original number of units. I think redemption was to be based on the # shares held on Nov 28th and dividend on shares held Nov 29th. If so, I should expect yet another adjustment!


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