# Ah, ZUT! Return of capital



## james4beach (Nov 15, 2012)

I hold BMO's utilities ETF, ZUT, which has good diversification.

BMO has now posted their 2012 year-end distribution characteristics. For ZUT, a whopping 20% of the distribution was Return of Capital! A reminder: that's largely your own capital handed back to you, without growth, so it may be cashflow but it's not an investment return. And it creates the illusion of a higher "yield" than you're actually getting from the underlying investments.

I'm surprised there's so much ROC. Do utility stocks themselves have ROC embedded within their distributions, like REITs do?

If it's not just the underyling stocks' ROC being passed through, then it must be BMO liquidating assets to boost the distribution amount. I'm seeing suspiciously high ROC portions for other funds too, like ZDV (their new dividend ETF). For 2012, a whopping 21% of ZDV's distribution is ROC.

As ZDV is largely financials & energy, I don't know how you can explain that one. I'll have to wait to see the annual financial statements before I can figure out what's going on here.


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## humble_pie (Jun 7, 2009)

james4beach said:


> I hold BMO's utilities ETF, ZUT, which has good diversification.
> 
> BMO has now posted their 2012 year-end distribution characteristics. For ZUT, a whopping 20% of the distribution was Return of Capital! A reminder: that's largely your own capital handed back to you, without growth, so it may be cashflow but it's not an investment return. And it creates the illusion of a higher "yield" than you're actually getting from the underlying investments.
> 
> ...




on your knees, ETF devout !

now is the hour to suffer, suffer, suffer for your couch potato sins.

see, us folks who hold the stocks outright never go through any shenanigans like this. One advantage of holding stocks outright - among significant other advantages like zero MER - is total control of the tax consequences.


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## andrewf (Mar 1, 2010)

^Not total control. 

You can't stop your favourite holding being acquired, realizing capital gains, for instance.


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## james4beach (Nov 15, 2012)

humble_pie said:


> on your knees, ETF devout !
> 
> now is the hour to suffer, suffer, suffer for your couch potato sins.


For sure, those are advantages of holding the stock outright. Better transparency of the dividends, and no fund shenanigans. If I had a large enough account, I would directly hold the stocks.


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## gibor365 (Apr 1, 2011)

james, I was thinking about ZUT , but wanted to wait when 2012 ROC will be published.... 20% this is ridiculous, better to buy FTS and EMA ...

I'm wondering what is ROC % for US Utilities like XLU and VPU?


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## mrPPincer (Nov 21, 2011)

I hope VDY, another mostly a financials and energy ETF, doesn't do the same as ZDV (21% ROC)
I'm starting to suspect I may yet regret buying this particular ETF


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## humble_pie (Jun 7, 2009)

yes, total control. The stock owner can take appropriate action before the record date of any merger, spinoff, acquisition, capital dividend, etc.

most acquisitions take the form of a (fairly complicated) rollover of a shareholder's original cost base, if he so chooses.

a wise shareholder also keeps an eye on the far horizon, so he knows whether his company is vulnerable to takeover. Often he has a good idea of who the predators might be.

in my experience, the number of reorgs which come as total surprises is small enough to be statistically negligible.


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## james4beach (Nov 15, 2012)

gibor said:


> james, I was thinking about ZUT , but wanted to wait when 2012 ROC will be published.... 20% this is ridiculous, better to buy FTS and EMA ...
> 
> I'm wondering what is ROC % for US Utilities like XLU and VPU?


I don't know about the US utilities.

I'm still scratching my head about how ZUT got all that ROC. Here's the mystery: I did look at each underlying, calculate its dividends, and when I put them all together I got the same portfolio yield that BMO has. In other words if I simply held each holding in the same proportion they have, I would end up with the same dividend (yield). So I don't see what the source of ROC would be.

It could be that some of those securities (e.g. energy trusts) have ROC in them. This means that even if I held the portfolio directly, without an ETF, I would have ended up with the same ROC. If that's the case, that's pretty sensible.


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## james4beach (Nov 15, 2012)

zylon said:


> *VDY* - no ROC in 2012


That's not really a fair comparison, since VDY was created in November 2012 and really hasn't had any 2012 activity. You would have to go through a complete calendar year to see really how they handle all their distributions.


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## humble_pie (Jun 7, 2009)

james4beach said:


> If I had a large enough account, I would directly hold the stocks.



tch. The heresies i keep hearing in cmf forum from the sworn & avowed couch potato devout !

another etf apostate says his best return comes from individual stocks held in his tfsa account. But these can never be counted as stocks, he says, because they are only "play money." Apparently this means he is still a couch potato virgin each:


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## james4beach (Nov 15, 2012)

I still think that managing a portfolio of individual stocks is a lot of work ... you have to revisit them regularly, adjust positions. You have to watch for companies in trouble.

If I decided to hold stocks individually, it would only be to replicate an index. And I would keep mirroring the index, because they are in fact doing all the above work. So for example with ZUT, yes I can imagine replicating the ETF with individual holdings but I still need the ETF to provide the guide.

That's just me. I like indexes.


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## mrPPincer (Nov 21, 2011)

zylon said:


> *VDY* - no ROC in 2012
> 
> 
> 
> ...


Ah, thanks zylon! 
So far so good then
VDY was only in existence for 2 months in 2012, but lets hope the 2013 distributions are 100% eligible dividends as they were in 2012


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## liquidfinance (Jan 28, 2011)

james4beach said:


> I still think that managing a portfolio of individual stocks is a lot of work ... you have to revisit them regularly, adjust positions. You have to watch for companies in trouble.


This is actually the reason why I am starting to move into ETF's and away form the individual stocks. An awful lot has changed over the last 12 months and I really don't have the time to spend watching the holdings.


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## andrewf (Mar 1, 2010)

Pie, it's hubris to say you can predict which stocks will be taken over with enough accuracy and precision to avoid having to realize capital gains. 

I'm fine with you saying that you can have _more_ control than with an ETF, because that is clearly true. But to say _total_ control goes a bit too far.


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## humble_pie (Jun 7, 2009)

when push comes to shove who doesn't love love love capital gains


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## humble_pie (Jun 7, 2009)

james4beach said:


> I still think that managing a portfolio of individual stocks is a lot of work ... you have to revisit them regularly, adjust positions. You have to watch for companies in trouble


trouble ?

how can this be trouble for the crown prince of credit default analysis :biggrin:
the cardinal of careful accounting :biggrin:
the king of cash management :biggrin:


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## james4beach (Nov 15, 2012)

humble_pie said:


> how can this be trouble for the crown prince of credit default analysis :biggrin:
> the cardinal of careful accounting :biggrin:
> the king of cash management :biggrin:


Do you mean me? I'm saying it takes a lot of work. Lots of time and energy, reading financial statements, etc. I don't have that kind of time to spend on a portfolio that's probably just going to perform similarly to XIU in the end.


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## james4beach (Nov 15, 2012)

zylon said:


> The thing I've found with ROC is that ETFs and companies as well, will have ROC as part of the distribution just so they can keep the yield at a level of their choosing.
> 
> A private REIT I own has 100% of distributions as ROC for as long as I've owned it. This doesn't bother me as long as the Net Asset Value of the REIT doesn't fall. It's a concern if the NAV falls at the same rate as the yield.


I think REITs are a special case due to capital depreciation.

There are lots of mutual funds where ROC does draw down the NAV. For instance with these high-payout Monthly Income Funds, they're liquidating part of the portfolio to make up the distribution so it's coming directly out of their NAV. Their NAV is slowly shrinking away over the years.

That is what I want to avoid


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## gibor365 (Apr 1, 2011)

james4beach said:


> Do you mean me? I'm saying it takes a lot of work. Lots of time and energy, reading financial statements, etc. I don't have that kind of time to spend on a portfolio that's probably just going to perform similarly to XIU in the end.


I'm not sure that reading those statements will really benefit you. Thousands of PhDs in every financial institution reading those statements 24/7. When you'll find trouble in specific company it would be for long time already priced in , frequently it would be priced in after hours, so it would be too late to do something.


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## james4beach (Nov 15, 2012)

I disagree. I think very few people read any of the financial statements.

I discovered this back in 2005, when nobody cared that Fannie Me was insolvent. The company *didn't even file* audited financial statements for over a year, yet people carried on like nothing was wrong! People kept buying the stocks, bonds and preferred shares.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... So I don't see what the source of ROC would be.
> 
> It could be that some of those securities (e.g. energy trusts) have ROC in them. This means that even if I held the portfolio directly, without an ETF, I would have ended up with the same ROC. If that's the case, that's pretty sensible.


If it is a trust - then there's likely RoC. It seems to be part of the trust structure as I have yet to see a trust that does not pay RoC. 
Though quickly glancing at the list, I'm not seeing anything that jumps out at me as trust. 

Regardless, if the ETF has the privileges and thinks it's a good idea to pay RoC, they likely will. 




zylon said:


> ... The thing I've found with ROC is that ETFs and companies as well, will have ROC as part of the distribution just so they can keep the yield at a level of their choosing...


Do you have any examples? I've seen common stock pay a capital dividend but have yet to see RoC.




zylon said:


> ...My idea of the perfect investment is all distributions rec'd as ROC ... All taxes deferred until I shuffle-off-to-buffalo.


So for this perfect investment, are you monitoring the ACB so that you can buy more and keep it positive and the capital gains tax deferred? Or the 100% RoC payments so small that the ACB will never be negative?

My understanding is that if the ACB is negative, the RoC is reported as a capital gain each tax year until the ACB becomes positive again.
http://www.taxtips.ca/personaltax/investing/taxtreatment/incometrusts.htm
http://www.theglobeandmail.com/glob...apital-means-to-fund-investors/article547291/

It's still likely a preferred tax rate but is no longer deferred.


Cheers

*Edit:*
Your perfect investment may exist (though I'm not finding the link right now). One of the MF companies that had a good writeup on dividends, income and RoC advertised a set of fund that paid only RoC. If I find it again, I'll update this post.

Or there's Chartwell Seniors Housing REIT where over the last decade, the RoC has ranged from a low of 83.2% to a high of 100%.
http://www.snl.com/IRWebLinkX/GenPage.aspx?IID=4100072&GKP=201825


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## andrewf (Mar 1, 2010)

There's plenty that can be hidden from financial statements, too.


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## humble_pie (Jun 7, 2009)

james4beach said:


> Do you mean me? I'm saying it takes a lot of work. Lots of time and energy, reading financial statements, etc. I don't have that kind of time to spend on a portfolio that's probably just going to perform similarly to XIU in the end.



i'm sure i spend far less time on portf including hundreds of options than the sworn couch potatoes do on all those massive financial analysis projects they like to tell us about.

as for XIU, i've held 3000 shares of XIU since 2001, soon after it debuted, so i know firsthand exactly how it has performed. Something like 65% of the return of my overall portf during those 12 years. Very poor.

i do continuously sell call options & occasionally puts in XIU, so this practice has helped some, adding .75 -1.20 in capital gains each year to an otherwise lacklustre performance.

my reason for continuing to hold XIU is that i view it as a defensive holding, a kind of bond proxy, in the sense that - unlike some corporate bonds - XIU will never go bankrupt. XIU + distributions + capital gains from option sales = higher return than bond funds imho.

interestingly, financial statements are an area where there are so many hordes of competent, even brilliant, pundits that a small retail investor - by definition an amateur - would be foolish to rely on his amateur efforts. Perforce, he must read knowledgeable analysts.

there is no reason for milliions of individual retail investors to toil hours over financial statements. "Not having the time" is just an argument thrown out by defensive couch potatoes, who can often be found squandering hours discussing metric trivia such as 20 basis points in an MER ...

speaking of analysts, there are some excellent analysts here in cmf forum. Chapeaux ! and there are some truly awful ones. It's fun to read both.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> I think REITs are a special case due to capital depreciation.
> 
> There are lots of mutual funds where ROC does draw down the NAV...


I suspect it's more to do with what is driving the RoC plus that most REITs have this particular option.

I can't think of any reason a MF or ETF or company that has property like a REIT would be barred from passing on the RoC - if they chose. I suspect it's not likely to happen because they want the depreciation to reduce their taxes. Plus I'm sure a lot of investors would be pissed off to suddenly have to start consider RoC as part of the common stock they own. :rolleyes2:


Cheers


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## andrewf (Mar 1, 2010)

So the secret is to listen to the analysts? Ah, but which ones? And what about the empirical evidence that suggests their analysis is not very useful, or a lagging indicator?


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## blin10 (Jun 27, 2011)

agree, I figured that long time ago as well, as a matter of fact I don't read any statements at all and been doing very well... I just stick with big companies with good track record



gibor said:


> I'm not sure that reading those statements will really benefit you. Thousands of PhDs in every financial institution reading those statements 24/7. When you'll find trouble in specific company it would be for long time already priced in , frequently it would be priced in after hours, so it would be too late to do something.


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## humble_pie (Jun 7, 2009)

there are at least 3 or 4 critical areas of corporate activity that interest me, that i investigate, long before i get around to looking at financial statements or reading what an analyst might say.

even then, one doesn't read analysts for their recommendations or advice. One reads them or listens to them in order to learn whether they have identified any sequence of numbers or any detail whatsoever - either positive or negative - that is unusual, unsettling, enough to jar the share price at some time in the future. Bref, one reads them for clues.

a good analyst can be dead wrong in his conclusions, but still well worth reading for clues imho.


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## gibor365 (Apr 1, 2011)

blin10 said:


> agree, I figured that long time ago as well, as a matter of fact I don't read any statements at all and been doing very well... I just stick with big companies with good track record


As an example, I was long JPM when they got hammered several months because of bad tradings.... and what the point I would be reading reports for hours?! In the morning everything was already priced in and didn't see a point in selling JPM with a big loss and couple of months later sold it already with a small profit.
Another stock I still hold albeit very small position - EGL.UN one one in my portfolio with double-digits yields, last earning were bad , so stock dropped sharply, but I had access to this report AFTER it already dropped, and what this report will give me.
In PSN example it was just fraud,1 report before last was very good, but all numbers were "fixed". 

I agree that you need to check fundamentals and so on when buying stock...


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## james4beach (Nov 15, 2012)

If you read the financial statements you would have seen that JPM has very high leverage and extremely high off balance sheet derivative exposure.

The situation is the same today, which is why I would never buy JPM.


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## Eclectic12 (Oct 20, 2010)

zylon said:


> A few quick examples of stocks I've owned, or still own; ...


Hmmm ... the list seems to be all trusts or former trusts so I suspect there's a misunderstanding. I took the "ETFs and companies" to mean "ETFs and regular stock companies". 

So the examples I'm looking for are stocks that pay both dividends and RoC where it's not a trust (or ETF or MF, for that matter).

Enerplus and Peyto are seem to be paying only eligible dividends now, so unless there's some reference to RoC in the future, they don't count for my purposes.




zylon said:


> For my private REIT the distribution is 8%. If I don't buy more shares, I'll start paying tax after 12 years.


So the REIT distribution is basically 100% RoC and you are monitoring the ACB. So is the plan to start paying capital gains (cg) [which will make it a blend of cg each year and cg when sold] or to make the ACB positive?


Cheers


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## doctrine (Sep 30, 2011)

> Do utility stocks themselves have ROC embedded within their distributions, like REITs do?


Most corporate utilities do not. If you owned CU, FTS and EMA, you'd have 100% eligible dividends. Expensive though, as are all utilities.


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## humble_pie (Jun 7, 2009)

james4beach said:


> If you read the financial statements you would have seen that JPM has very high leverage and extremely high off balance sheet derivative exposure.
> 
> The situation is the same today, which is why I would never buy JPM.


but james, this is what you say About Every Thing.

(i apologize ... but u are fun to tease ... whoever heard of an investor who has held 92% bonds plus 8% equity etfs ... oh ... ever since ... 2007)


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## james4beach (Nov 15, 2012)

To clarify, my small equity exposure (like 8%) has been that low going back even further, to the late 1990s.

I have very little in equities, and my returns in cash & GICs has been stellar over the last 15 years or so. Far better than most peoples stock returns... and certainly much better "risk-adjusted returns". Cash is king.


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## gibor365 (Apr 1, 2011)

humble_pie said:


> but james, this is what you say About Every Thing.
> 
> 
> 
> > There is no perfect investment and cannot be, as if everyone would like to buy perfect one, who would sell?! and what the price would be?!


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## Eclectic12 (Oct 20, 2010)

doctrine said:


> Most corporate utilities do not. If you owned CU, FTS and EMA, you'd have 100% eligible dividends. Expensive though, as are all utilities.


So far, I've found RoC in trusts, ETFs, MFs and split shares. I've seen reference to structured products such as a closed ended investment fund as well. Every example I can find tax data for dividend paying stock does not include RoC.


Cheers


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## webber22 (Mar 6, 2011)

Although not published publicly, BMO is going to *drastically cut some distributions* shortly. This is what was sent to the advisor community:

BMO Monthly Income will reduce its distribution from $0.06 per unit monthly to $0.024 – a reduction of 60 percent. 
BMO Global Monthly Income will see its distribution fall from $0.055 to $0.016 per unit monthly – a 71% cut. 
Both changes are on May 16


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## andrewf (Mar 1, 2010)

What's the opposite of shocking?


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## My Own Advisor (Sep 24, 2012)

ouch  That's not the answer.


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