# Q re dividends for ZCN & ZDV



## none (Jan 15, 2013)

Does anyone know when dividends from ZCN & ZDV should come in? The payment date was April 4th but nothing has shown up in my account - I have it set for synthetic DRIP. I would have thought it would have been at least by today.
Thanks.


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## none (Jan 15, 2013)

Called in and got my answer - they are true trips so take a few weeks to come through. I thought they would be synthetic drips. Live and learn.


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## Cal (Jun 17, 2009)

For the drips I have registered in my name for traditional drips, the paperwork can take up to 3 weeks to receive. It is normally online on the transfer agents website within a day or so.


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## james4beach (Nov 15, 2012)

I've been watching ZDV since its introduction to see the tax composition of their distributions. I was disappointed to see in 2012 it distributed so much return of capital ... 0.158044 of its total 0.736071 distribution (21%) is ROC!

Why is it distributing so much ROC? The relatively steady monthly distribution suggests to me that they're padding the distribution with "bad ROC" (sales of assets) to make the constant cashflow.

At 21% ROC, it kind of defeats the purpose of a dividend fund doesn't it? You're supposed to be getting dividends paid by companies, not just your own money back.


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## doctrine (Sep 30, 2011)

I don't know either, but the other dividend ETFs aren't any cleaner. They do not seem good investments for taxable accounts as it can make for more complicated accounting. Easy enough in an RRSP or TFSA though. One look at the holdings of ZDV, though, makes me shudder.


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## james4beach (Nov 15, 2012)

Yeah I agree that the top ZDV holdings don't look so hot. Probably because they weight them by dividend yield, so the riskiest stocks become the largest holdings.

I would have loved to see a Canadian dividend fund that distributes substantially all eligible dividends... something like that would be great in a non-registered account. So far XIU is the only good option I see for that.

I still don't understand why the dividend ETFs in general have so much ROC. Even if you put it in a sheltered account, you still have the fundamental problem that ROC is not productive (harmless, but it's not earnings). May be harmless to be handing back your capital, except that you pay higher MERs for all these ETFs. Why should I pay someone for them to give me back my capital?


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## james4beach (Nov 15, 2012)

By the way, return of capital is not automatically a bad thing (nor does it necessarily mean they are liquidating shares and handing you back your own money). Many different accounting transactions can end up being reported as ROC
Prepare for a headache... good vs bad ROC

As of yet, I still don't have a 100% grasp on how to identify good vs bad ROC when looking at the financial statements. I suspect the key is to look at how much dividend earnings the fund had in total, versus the total cash they paid out. If they're paying out a similar amount to what they earned from stock dividends, I think that's fine.

e.g. from ZDV's 2012 annual financial statement: the fund earned $3.2 million from dividends. Net investment income after expenses was $3.0 million. They distributed $3.1 million. So that seems in the right ballpark to me.

I'm just guessing though. I'm avoiding everything with significant ROC until I figure out exactly what is happening.


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## doctrine (Sep 30, 2011)

I don't know how firms decide what is ROC or not. I've looked at a lot of financial statements and I still haven't figured it out. In the end, I don't invest in any companies in taxable accounts that return ROC - I try to keep everything 100% eligible dividends. Thankfully, the elimination of income trusts has made this quite a lot easier as most of them now distribute eligible dividends.


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## james4beach (Nov 15, 2012)

Glad you wrote this, doctrine. Means I'm not the only one who can't figure it out despite looking at the financial statements.


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## Jagas (Feb 11, 2013)

I'll take the contrarian view just for fun and declare my love of ROC in my non-registered accounts. Cash flow? Good! Not taxable? Good! I don't view the additional tracking as any worse than tracking ACB for DRIPs, maybe much better. And the increased gain down the road? If I ever do sell, the tax rate will still be superior to dividends and will be discounted for time value of money. Any takers? :cower:


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## james4beach (Nov 15, 2012)

Jagas said:


> I'll take the contrarian view just for fun and declare my love of ROC in my non-registered accounts. Cash flow? Good! Not taxable? Good! I don't view the additional tracking as any worse than tracking ACB for DRIPs, maybe much better. And the increased gain down the road? If I ever do sell, the tax rate will still be superior to dividends and will be discounted for time value of money. Any takers? :cower:


And I'm not picking on all ROC, just the kind that comes from handing your own cash back to you (often by liquidating assets). And I'm not saying ZDV does this... I don't think it does... but other mutual funds do. For example the "monthly income" funds.

The benefits you list aren't really benefits, they're null operations. "Cash flow"... well ROC is not cashflow you didn't have before. You took cash, put it in a fund, and they're giving your cash back. You already had the cashflow before. If you simply had not put the cash into the fund, you'd be in exactly the same place!

Not taxable? Again it's a null operation. It started as your own post-tax cash. It never was taxable to start with!

It's exactly as if your brokerage has a sub-account, and you transfer $1000 into the sub-account. Then you withdraw $10 a month from it, and you say -- hey look! It's giving me cashflow. And no tax consequence!

It's harmless -- a null operation -- but here are two problems resulting from ROC

1) Fund companies *mislead *investors about the 'yield' of a product by adding in ROC. Again, monthly income funds are a big culprit, for an example google XTR actual yield. The fund actually yields around 3.7%, but it's marketed as a fund that distributes 5.8%. That's fine if you actually understand where the 5.8% comes from (3.7% earnings + 2.1% your own assets). Most people don't understand that. I know that most people don't because it's common for people to DRIP the monthly income funds. That behaviour indicates they have been mislead by the fund company.

2) The misrepresented 'high yield' translates to higher fees of the fund. The product could simply be an index fund that also does some ROC. They'll charge a higher MER for this... that's unjustified, as they're not doing anything to make you money.

This is why I avoid anything that smells of ROC. I don't want to risk the chance that I'm paying a higher MER purely because they've fooled me with some ROC.

The most cynical amongst us would say that fund companies deceive the investing public using ROC, and then collect higher fees based on artificially high distribution yields. I think you could launch a successful lawsuit on that for misrepresenting an investment product. I've seen enough of how they're marketed to know that they're misrepresenting the distributions.

In fact, let's estimate the monetary damage inflicted by singling out three funds with ROC-exaggerated yields (there are many more of course... this is the tip of the iceberg)
BMO Monthly Income Fund
CIBC Monthly Income Fund
iShares XTR monthly income

BMO's has $4.1 billion, CIBC $6.2 billion, iShares $0.8 billion for total $11 billion just in this small sample.

Let's be generous and say that only half, $5.5 billion, of investor money has been attracted into these due to misrepresented yields. And let's say they're paying an MER premium of 0.2% stemming from this misrepresentation.

The damage done to the investors in these 3 funds is approx $11 million a year. Unnecessary fees they're paying, under the mistaken belief that the fund is earning something special vs a plain index fund.


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## Eclectic12 (Oct 20, 2010)

Jagas said:


> I'll take the contrarian view just for fun and declare my love of ROC in my non-registered accounts. Cash flow? Good!
> 
> Not taxable? Good! ... And the increased gain down the road?


By your own admission - you really mean "tax deferred" instead of "not taxable". Or if you insist - "not taxable in the current tax year".

I prefer "tax deferred" as a reminder that if the ACB becomes zero - then the RoC payments will have to be reported as a capital gain in the year paid. 


In any case - IMO it is misleading to say "not taxable" when capitals gains will have to be paid, either way. 

There is enough confusion where many people don't understand that ETFs, MFs or split shares can pay RoC as well as the bookkeeping this requires, without adding confusion about the tax consequences.




Jagas said:


> If I ever do sell, the tax rate will still be superior to dividends and will be discounted for time value of money. Any takers? :cower:


From what I understand - this will depend on where the RoC is coming from. 

An example of the good type is a REIT that is depreciating the property without impacting the ability to make money.

An example of the bad type is if it's your own after-tax money being paid back to you. In effect - post-tax money is having additional capital gains tax applied to it, either in future or now.

http://howtoinvestonline.blogspot.ca/2010/07/return-of-capital-separating-good-from.html

Cheers


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## james4beach (Nov 15, 2012)

And I love how it's next to impossible to distinguish the good from the bad ROC... that's a really bad sign in the investing world, when it gets complex and confusing enough that you have to start guessing at what's going on under the hood.

That kind of thing tends to come along with fraud & crooked business. History shows that when an investment is opaque and confusing, there tends to be someone exploiting you

Combine that with the huge current popularity of dividend & income funds -- chief users of the ROC ingredient -- and you have to be really suspicous of what's going on


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## none (Jan 15, 2013)

My ZCN is down almost 6% since I bought it last month. I think I'm going to wait to see if it goes down to 10% before I buy more. Gotta keep that balance.


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