# Dividend 15, where did performance go?



## james4beach (Nov 15, 2012)

As I understand it, Dividend 15 Split Corp is a fund that takes a portfolio of shares, with some option writing, and then *converts the total return* into different buckets:
* DFN : most of the capital risk but a higher dividend yield
* DFN.PR.A : stronger protection of dividend stream, less capital risk

In my interpretation, this is just a slicing and dicing of a portfolio's total return. Really, as long as the underlying portfolio performs well, you can slice it up all you want. Dividends and share price appreciation have an equivalence (that many people refuse to acknowledge) but Dividend 15 makes use of that equivalence, creating "dividends" out of total return -- because people love dividends.

I took a look at their underlying portfolio. It's 53% exposed to financials and also has a 10% cash cushion. The portfolio's 5 year cumulative total return is about 87%.

Now I want to see if the performance of the split shares sum up to the underyling performance. According to year-end financial statements, net assets attributable to DFN shares were about equivalent to the liability of DFN.PR.A the preferred shares. So they have close to 1:1 ratio, I think.

According to stockcharts, which does take into account dividends, DFN.PR.A cumulative 5 year return is 29.5% and DFN cumulative 5 year return is 76.8%

That overall total return (0.5 x 29.5% + 0.5 x 76.8% = 53%) comes up far short of the 87% cumulative return of their portfolio. In annual return figures,

Underlying portfolio of TSX securities returned 13.3% per year
Dividend 15 Split Corp both shares in total returned 8.9% per year

*The shortfall is over 4% per year in annual total return "lost"* -- have I calculated this correctly?

Could it be that Dividend 15 Split Corp is just a very intelligent way to take more money from investors, by refactoring total returns?


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## james4beach (Nov 15, 2012)

It could also be that DFN.PR.A is still worth it, despite the big picture performance loss, because you are still (somewhat) insulated from potential price declines. Another group of shareholders has assumed the majority of the risk of the overall portfolio.

I don't understand why anyone would buy DFN, the class of shares that have more risk exposure.


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## james4beach (Nov 15, 2012)

And if my calculations are correct, their options trading isn't adding any value at all. If it was creating additional returns, there wouldn't be an overall 4% shortfall between the underlying portfolio and the aggregate share performance.

This is also the case on covered call ETFs, which in the last few years have consistently had _lower_ total returns than the plain indexes they follow.

I think the magic of Dividend 15 Split Corp does not come from option trading, but rather from the willingness of investors to agree to different risk/reward tradeoffs (DFN vs DFN.PR.A). There's a transfer of risk here that benefits the preferred holders at the detriment of common shareholders.


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## Jimmy (May 19, 2017)

I think you are right. The preferred share PR.A has no cap appcn ( you buy and they redeem the share at the same price) and it just pays a 5.25% yield. I think the concern is the fees are ~ .65% if I read the prospectus right.

The common share DFN has a floor for price (issue price) but I think is designed to provide a max or 'target' return of 8%. I think though if the share price stays at the floor you could get 0% return so there is the risk 

So the combined for both is 13% ( what you calculated). Looks like they keep any upside as well above the 13% which is the case in your example (ie return was 53% vs 87% for underlying stocks )

The risk is any capital appreciation above 8% they get. 

The PR.A is ok for risk ( about A level bonds) at pfd3 too. Pfd1 and Pfd2 are better risk grades for preferred shares though.


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## dubmac (Jan 9, 2011)

I didn't really understand how the whole "split-share" thing works. As far as I know those products have a shelf-life after which the fund is dissolved and investors paid from the proceeds after a certain point in time.
As far as I can tell, retirees invest in these products - put say 50K into DFN, and get $450 a month. That maybe an idea for the future - but not now.
That said - when the markets tank, like Jan 16, 2016 - one could always put in a stink bid and buy some - but that's a speculators game.


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## andrewf (Mar 1, 2010)

The pref share doesn't pay the management fee. The pref gets 5.25% yield on the original price. The fee comes out of the capital share's return.


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## agent99 (Sep 11, 2013)

james4beach said:


> As I understand it, Dividend 15 Split Corp is a fund that takes a portfolio of shares, with some option writing, and then *converts the total return* into different buckets:
> * DFN : most of the capital risk but a higher dividend yield
> * DFN.PR.A : stronger protection of dividend stream, less capita


James, DFN doesn't get paid a dividend! (hopefully a distribution made up of mostly CGs and ROC and maybe a little bit of dividends)

The way these things work, is that a fund manager chooses a basket of stocks that pay, say 3% dividend. The create a $25 unit and split it say $15 preferred and $10.00 capital units. The dividends the companies pay go mainly to the pfds. So they get 3x25/15=5% and that is what is guaranteed to be paid on the pfd units. If dividends increase and/or the stock price increases, the resulting gains are paid to the capital unit holders. They usually set a distribution for the capital shares that they think they can sustain based on appreciation plus their options trading gains(?). If they find that they can't meet those capital payments, they either reduce them or just pay out ROC. In some cases when dividends have been cut, even the pfds may have some ROC.

In good times you can make money on the capital shares, because any gains are leveraged. Pfds trade up and down, but if held to maturity should pay back your investment. In that way they are a lot like short term bonds. But they could fails. Nothing with a 5% yield is a sure bet.

Management expenses come out of the fund as a whole but are not deducted from the distributions.

More here for those interested:
http://business.financialpost.com/uncategorized/opt-for-dividend-half-of-split-share-companies
http://www.investingintelligently.com/2006/04/25/split-shares-what-are-they/comment-page-1/
https://www.theglobeandmail.com/glo...he-confusion-over-split-shares/article623174/


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## james4beach (Nov 15, 2012)

agent99, call the DFN distribution what you will ... some combination of different things. My point is that the combined total returns of both the capital units plus preferred shares falls shy of the total return of the underlying stock portfolio.

The underlying portfolio has made 13.3% annual return over the last 5 years, and yet investors in DFN & DFN.PR.A have made much less than this. Is the management pocketing the difference?


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## Jimmy (May 19, 2017)

I think there is a problem w the % s you are using because you are using the price of each split part. ( the $15 and $10 per sahre)
ie the preferred share return % is the dividend $/ $ 15 and the DFN % is the cap gain $ / $10. 

If you divide them by the total sh price ie $25 you should get the same return as w your portfolio.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> .... The underlying portfolio has made 13.3% annual return over the last 5 years, and yet investors in DFN & DFN.PR.A have made much less than this. Is the management pocketing the difference?


Are you expecting management to work for free?

I am not sure of your numbers but the description written up for split shares back in the early 2000's described it as management making a slice from the initial selling and an ongoing slice.


Something else to keep in mind is that the capital shares won't necessarily trade all that close to the asset values. When TRP was in trouble, cut their dividend the split corp I looked at had the capital share trading at $1 where it should have been at zero (or more around -$0.75).




> Could it be that Dividend 15 Split Corp is just a very intelligent way to take more money from investors, by refactoring total returns?


 ... only for those trying to use a screwdriver as a shovel. 

Anyone who has taken the time to learn about split shares will have a narrow purpose for it as well as keep checking if it still fits.


Cheers


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## agent99 (Sep 11, 2013)

I didn't try and follow James' figuring, but as already mentioned, dividends change over time. Also the fund raises money by selling additional units and may use some of this money to maintain the capital share distributions. Unit holders also retract units each year, which requires some of holdings to be sold off. They are mutual funds and other than published management fees, they can't "pocket" unit holders money!

By the way, a search would bring up several earlier discussions about this same fund and with some of same participants  For example: http://canadianmoneyforum.com/showt...ssible-for-DFN-to-earn-10-yield?highlight=dfn


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## james4beach (Nov 15, 2012)

Jimmy said:


> I think there is a problem w the % s you are using because you are using the price of each split part.


Maybe I didn't calculate it accurately but consider just the capital DFN shares. Their 5 year cumulative performance, distributions and all, is 77% (chart).

The underyling portfolio, even including the cash component, *should have returned 87%.*

I thought that DFN was at least supposed to give you leveraged exposure to the capital gains, but instead it's done worse than the portfolio even during a powerful bull market. Maybe it's because new shares were issued?

I really don't see the appeal of DFN shares, at all. Their web site explicitly describes the capital shares as giving leveraged stock exposure, but this does not appear to have worked out as promised.


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## Jimmy (May 19, 2017)

james4beach said:


> Maybe I didn't calculate it accurately but consider just the capital DFN shares. Their 5 year cumulative performance, distributions and all, is 77% (chart).
> 
> The underyling portfolio, even including the cash component, *should have returned 87%.*
> 
> ...


I found this in the prospectus under 'Fees and Expenses' . They take a huge mgmt fee tied to the return performance too. It is complicated. Better explained w an example. The 'Bonus Threshold' is the previous yrs closing NAV. Say the unit was $10 in 2015 YE This is now the Bonus Threshold for 2016 . Any returns above 112% x the Bonus Threshold ( $10) , they keep 20% of as a mgmt fee. So anything above 1.12 x $10 = $12 they take 20% of the excess. So if DFN goes to $20 , they take 20% X $8 ($20-$12) or $1.60 as a management fee. That is why the returns are less than the 87% for the underlying portfolio.



> Quadravest is also entitled to a performance fee equal to 20% of the total return per Unit of the Company
> for a financial year (which includes all cash distributions per Unit made during the year and any increase in the
> Net Asset Value per Unit from the beginning of the year after the deduction on a per Unit basis of all fees, other
> expenses and distributions) that exceeds 112% of the Bonus Threshold. The Bonus Threshold , for any
> ...


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## james4beach (Nov 15, 2012)

There we go -- huge fees.

In my opinion this whole thing is a sleight of hand/misdirection trick to re-factor total returns into dividends that people crave. Quadravest is exploiting the current day obsession with dividends and income investing.

Quadravest understands dividend/capital gain equivalency, but people buying the shares do not. They focus the investor's attention on the dividend/distribution stream and using this "misdirection", take enormous management fees for what is otherwise a pretty simple investment portfolio.

The splitting of shares further aids the sleight of hand, giving each share class an appearance of certain characteristics, and drawing attention away from the big picture results of the corp.


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## Jimmy (May 19, 2017)

james4beach said:


> There we go -- huge fees.
> 
> In my opinion this whole thing is a sleight of hand/misdirection trick to re-factor total returns into dividends that people crave. Quadravest is exploiting the current day obsession with dividends and income investing.
> 
> ...


Agreed. Here is a good article on this issue and not recommending splits in general . Looks like they also use call options to generate the returns for DFN. A big concern for split shares is they are wound up so you will have some tax issues and costs on their sale. Maybe there are other split preferred shares that are more perpetual w out those problems - the yields are attractive.



> The split shares will wind up on December 1, 2019. That’s a drawback to split shares in general, and Dividend 15 Split shares in particular. Unless the windup date is extended, you will be forced to cash in your investment and deal with the tax consequences at that time. You’ll also face brokerage costs to reinvest any proceeds after you’ve redeemed your shares.


http://www.tsinetwork.ca/daily-advice/how-to-invest/investing-in-stocks-split-share-corporations/


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## gibor365 (Apr 1, 2011)

> There we go -- huge fees.


Still those fees much less than MF ones and I prefer to pay those fees and hold only DFN.PR.A than ho hold 15 underlying prefs.


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## andrewf (Mar 1, 2010)

The preferred shares do not pay any fees. It comes out of the class A share return.


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## doctrine (Sep 30, 2011)

These split companies are very difficult to figure out. It is FAR better just to hold the underlying holdings. And after 10 years, you'll have a pretty good dividend stream of your own. And perhaps even more capital gains.

The bonus fee really caps your upside. Stocks return 8% a year, but that is just the average. Because of the volatility, a +25% year is not that unusual. Heck, the Canadian bank index has returned about 25% in the last year. Selling calls or investing in something that will take 20% of returns after a certain point is really foolish long term thinking, in my opinion.


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## dubmac (Jan 9, 2011)

doctrine said:


> These split companies are very difficult to figure out. It is FAR better just to hold the underlying holdings. And after 10 years, you'll have a pretty good dividend stream of your own. And perhaps even more capital gains.


I agree.
but are these products (like DFN) a good choice for a retiree who is looking for yield (not cap gains) on an investment?


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## agent99 (Sep 11, 2013)

There are quite a number of these spits. They must appeal to quite a number of investors. And they need to sell both capital and pfd units for them to work. 

At one time I owned capital units of some splits and did very well. The markets was roaring at that time. I still own a few, but because of ROC, they are trading well above my acb. I sell them off when I need to balance something I am selling at a loss. 

I do own split pfds. They pay a healthy dividend and can be sold at any time. I am not concerned about the stocks they own, but am concerned about the companies running these funds. As a result I try not to own too much of any single fund. I have been a bit lax, but should try to keep better tabs on their downside protection. Anyone know if this is documented anywhere on the net?


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## agent99 (Sep 11, 2013)

andrewf said:


> The preferred shares do not pay any fees. It comes out of the class A share return.


Maybe, maybe not.

From DBRS:



> The dividend coverage available to the preferred shares is calculated by dividing the net dividend income
> of the portfolio *(after deducting issuer expenses and fees)* by the fixed preferred share dividend payout. If
> the dividend coverage ratio is greater than 100%, the issuer can fully fund preferred share distributions with income generated from the portfolio. This allows the issuer to maintain a stable level of downside protection to the preferred shares if the market value of the portfolio stays constant, assuming the capital shares receive only excess portfolio income.
> If the dividend coverage ratio is less than 100%, the issuer will be forced to liquidate a portion of the securities held in the portfolio to meet preferred share distributions or generate income through other sources such as option writing or securities lending.


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## james4beach (Nov 15, 2012)

doctrine said:


> These split companies are very difficult to figure out. It is FAR better just to hold the underlying holdings. And after 10 years, you'll have a pretty good dividend stream of your own. And perhaps even more capital gains.


I agree, it's better to just hold the underlying yourself. At least then you know exactly what your exposures are, plus you get full upside.

A split corp like this really confuses the risk/reward picture. How exposed to down side is a preferred shareholder? There clearly is downside possibility. When the TSX fell in early 2016, at the time the TSX was down -9% YTD, the DFN.PR.A was down -5%. How this would shake out under true market stress, like a severe bear market, is anyone's guess. Get a lawyer and study the prospectus, I guess.

I don't like this kind of complexity. Add to this the complication of the termination date...


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## james4beach (Nov 15, 2012)

PS, their portfolio is too heavily exposed to the financial sector. More than 50% in a single sector is crazy.


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## gibor365 (Apr 1, 2011)

james4beach said:


> I agree, it's better to just hold the underlying yourself. At least then you know exactly what your exposures are, plus you get full upside.
> 
> A split corp like this really confuses the risk/reward picture. How exposed to down side is a preferred shareholder? There clearly is downside possibility. When the TSX fell in early 2016, at the time the TSX was down -9% YTD, the DFN.PR.A was down -5%. How this would shake out under true market stress, like a severe bear market, is anyone's guess. Get a lawyer and study the prospectus, I guess.
> 
> I don't like this kind of complexity. Add to this the complication of the termination date...


When in 2015 TSX were down 27% in several months, DFN.PR.A was down 6% (for the same period)


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## humble_pie (Jun 7, 2009)

james4beach said:


> I agree, it's better to just hold the underlying yourself. At least then you know exactly what your exposures are, plus you get full upside.
> 
> A split corp like this really confuses the risk/reward picture. How exposed to down side is a preferred shareholder? There clearly is downside possibility. When the TSX fell in early 2016, at the time the TSX was down -9% YTD, the DFN.PR.A was down -5%. How this would shake out under true market stress, like a severe bear market, is anyone's guess. Get a lawyer and study the prospectus, I guess.




no need for a lawyer. Any good option trader can spot the glaring weakness in the DFN structure, which is its particular kind of greedy option strategy. Big revenue $$$ upfront followed by erosion of capital. This is the heart & the cause of DFN product weakness.

i've posted in detail about this faulty strategy in previous DFN threads, including the very first DFN thread several years ago, where a certain well-known couch potato financial advisor in cmf forum was touting the product. However i believed that the DFN option strategy is faulty & can only be offset by repeated new share offerings, which turn the operation into a kind of ponzi scheme. I still believe the same.

btw ironically enough, the DFN operation will actually benefit slightly from a 10-15% downward correction in its underlying stocks. Because such a correction halts the hemorrhage of option assignments.

.


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## james4beach (Nov 15, 2012)

Very interesting, humble_pie !


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## humble_pie (Jun 7, 2009)

james4beach said:


> Very interesting, humble_pie !



jas4 i'd explained the faulty DFN option model many times before, but am discouraged now from explaining for the umpteenth time because one or 2 of the posters on here could not understand, therefore went into trademark rude & insulting mode ...

note to dubmac: the DFN model is on the weak side. The company is committed to protecting the preferred shares, however a commitment is not a guarantee. A broad & prolonged market collapse will stop the option writing (a big source of revenue although the kind of option writing quadravest does ends up depleting capital in rising markets, as james4b has noted.)

such a market collapse will also bring on dividend cuts in the underlyings, which in turn will trigger DFN divvy cuts, first in the common shares but then in the preferreds as well ... either that or the managers will have to cannibalize the capital even further, in order to make up a few more preferred dividends ...

sensible posters above are suggesting that a retired person could settle for simply owning some of the underlying shares. The dividends might be slightly less but - to myself at least - the transparency is worth a great deal more.

speaking of the underlying shares, they are another DFN worry. A good part of the option model trauma is caused, or rather was caused, by the fact that the managers always had to write options on the exact same 15 underlying stocks. They could not go to any other options.

a year or 2 ago, DFN amended its prospectus to say that the managers could now sell options on "other" shares. I don't believe they stated exactly which other shares. I notice they don't appear to be mentioning "other" companies or "other" options in their 2016 financial statements, so who knows what they are doing.

why would this be a worry? it's like all those ETFs & funds whose prospectuses state that they are authorized to carry on "representational sampling" in share ownership. Somehow in canada, regulators are not yet requiring that these product vendors be required to state exactly which samples, etc.

this means that proxies can be utilized without the public knowing exactly what such a fund is really doing. With respect to DFN, i'd be concerned that the managers might be drawn to writing more lucrative call options on more volatile securities, in order to increase the revenue stream. But (more lucrative + more volatile) = more risk.

another reason for a retiree to stay with the simple individual underlying stocks & avoid the tricky bundles, imho.

.


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## agent99 (Sep 11, 2013)

james4beach said:


> PS, their portfolio is too heavily exposed to the financial sector. More than 50% in a single sector is crazy.


James, Some split corps hold _just_ financials, in some case just the 5 banks. Others are based on just a _single_ stock. This doesn't make them 'crazy'. It is up to the investor to diversify. 

The old adage "Never invest in a company you don’t understand." holds true. But in some ways, split preferred shares are easier to understand than individual corporate preferred shares (and some of those haven't done too well!). 

I wouldn't touch the capital shares of any of the splits at a time like this. However, split preferreds with 5% yield and maturity in under 5 years are worth considering and I hold several. Most trade above their retraction value, so market seems to agree.


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## dubmac (Jan 9, 2011)

Thanks HP. I recall the thread here http://canadianmoneyforum.com/showt...ssible-for-DFN-to-earn-10-yield?highlight=DFN
I read most posts and understood that the basic structure is one with inherert risk. 
A relative of ours is living on an inheritance - she is somewhat naive, has a/some mental health challenge & has little interest in things financial - she relies on "fixed income' (GIC's and other) for her daily bread. These sources are eating away at the capital. I do not think that this is a good source of income for her.


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## doctrine (Sep 30, 2011)

dubmac said:


> I agree.
> but are these products (like DFN) a good choice for a retiree who is looking for yield (not cap gains) on an investment?


No, absolutely not, and for many reasons. They're complicated, they're leveraged, they have high fees, they erode capital and the dividend is not sustainable. The 11% yield is a market signal that the dividend is being paid out of capital, given that the underlying holdings have 3-5% yields and perhaps a total return of 8% a year. Losing 3-5% a year is a lot, but can be given the illusion of sustainment through financial engineering for years before it crashes down. 

In the current environment, with the risk free rate at 1%, yields under 4% are usually solid and growing far faster than inflation. Yields of 4-6% are good and can have some growth but usually closer to inflation. Yields above 6% have more risk, less growth and there is also capital risk. Above 8% is a warning sign. A yield above 10% should be considered distressed.


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## gibor365 (Apr 1, 2011)

doctrine said:


> No, absolutely not, and for many reasons. They're complicated, they're leveraged, they have high fees, they erode capital and the dividend is not sustainable. The 11% yield is a market signal that the dividend is being paid out of capital, given that the underlying holdings have 3-5% yields and perhaps a total return of 8% a year. Losing 3-5% a year is a lot, but can be given the illusion of sustainment through financial engineering for years before it crashes down.
> 
> In the current environment, with the risk free rate at 1%, yields under 4% are usually solid and growing far faster than inflation. Yields of 4-6% are good and can have some growth but usually closer to inflation. Yields above 6% have more risk, less growth and there is also capital risk. Above 8% is a warning sign. A yield above 10% should be considered distressed.


imho, there is a big difference between DFN and DFN.PR.A


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## doctrine (Sep 30, 2011)

Why own DFN preferreds when you can own investment grade preferreds from the same underlying investment grade companies with the same (5%) yield? Some Cdn prefs even have floor yields with rate resets higher, win-win in a rising rate environment. DFN is inherently riskier, and there might be some hidden fees and some risk of capital return in some really worse case scenarios, so where is the risk premium?


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... I really don't see the appeal of DFN shares, at all. Their web site explicitly describes the capital shares as giving leveraged stock exposure, but this does not appear to have worked out as promised.


I don't know either as DF OTOH, dropped to went from about $8 in early Dec 2015, then hit $3.15 on Jan 20th, 2016 to be at about $7.50 around Christmas 2016. Where one makes a choice - DF is better suited to taking advantage of dips.

Similar behaviour in 2008 where August's $10 turned into under $4 in Dec 2008, then a low of $2.22 in Feb 2009 where by end of 2010, it was trading for $11+.


Cheers


*PS*

My guess would be that DFN's prospectus date of Oct 2006 meant the underlying portfolio cost more so that there's less leverage for the capital shares?


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## Eclectic12 (Oct 20, 2010)

agent99 said:


> There are quite a number of these spits. They must appeal to quite a number of investors. And they need to sell both capital and pfd units for them to work ...


Or they would have been wound up long ago.
http://business.financialpost.com/n...becoming-countrys-largest-split-share-company




agent99 said:


> ... At one time I owned capital units of some splits and did very well. The markets was roaring at that time. I still own a few, but because of ROC, they are trading well above my acb. I sell them off when I need to balance something I am selling at a loss ...


Interesting ... I'll have to check as the ones I can recall paid eligible dividends. It may be that I don't typically hold a capital share for more than a couple of years.




agent99 said:


> ... I have been a bit lax, but should try to keep better tabs on their downside protection. Anyone know if this is documented anywhere on the net?


I have seen a "downside protection" percentage listed for the Scotia managed splits, on the summary page. All the others I have looked at seem to expect the investor to DIY.


Cheers


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