# A way to get 5.7% yield investing in banks



## james4beach (Nov 15, 2012)

I know that everyone loves the strongly-performing Canadian banks, so for a moment I'll put on my bank-lover hat and pretend that the recession won't hurt the banks.

I was observing in another thread that the BMO covered call ETF (ZWB) consistently does _worse_ than the regular bank ETFs, both ZEB and XFN. Basically ZWB pays out higher monthly income but at the detriment of capital gains, as one would expect from covered calls. The net result is a worse total return than ZEB, which is unfortunate.

I understand that lots of people want the yield because the cashflow is important. *How about this method: just hold ZEB and additionally sell 1% of the shares every 6 months. This would achieve a 'distribution' yield of 3.7% + 2% = 5.7%*

This would be nearly all eligible dividends and capital gains, which are very tax efficient. And your total return would be the same as ZEB. It seems win-win: higher yield than regular banks and higher total return than ZWB.


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## james4beach (Nov 15, 2012)

By the way this is the method that Warren Buffett recommends. He illustrated that regularly selling off some shares does not necessarily produce a worse long term return. In fact, it gives the shareholder the ability to determine how much cash they want to extract from their equity:

http://seekingalpha.com/article/3214966-berkshire-hathaway-and-the-sell-off-approach


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## tkirk62 (Jul 1, 2015)

That article definitely shows that owning one million dollars worth of Berkshire means you are unlikely to run out of money by selling shares to fund your spending. It can't be extrapolated to say much more than that. It probably would have worked with Valeant over the past ten years as well. 

Dividends also give one the ability to choose how much cash to extract from their equity. That term is called the yield, and investors are perfectly capable of choosing their yield. 

Not trying to start an argument, just saying that that article clearly cherry picks its timeframe and stock to prove a point.


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## fatcat (Nov 11, 2009)

we have had some interesting discussion about the merits of dividend growth and living off dividends only vs indexxing and merely selling shares when and if one needs income

andrew i think made a good case for the latter much as buffet does


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## james4beach (Nov 15, 2012)

Do you happen to have one of those old threads handy? I'd be happy to re-read it, but I can't remember what to search for.


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## fatcat (Nov 11, 2009)

my search came up empty
these were threads that are at least 2 years old i think
try messaging andrewf directly and see if he can remember
he had some good ideas on the subject


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## james4beach (Nov 15, 2012)

By the way, I can see how "dividend investing" is viable if you are directly investing in individual stocks (and by extension, have the time and skills to pick them and manage your portfolio). There are people on this forum who do this, and have great dividend stock portfolios.

But high-dividend mutual funds and ETFs... no way. The fees are prohibitively high.


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## leoc2 (Dec 28, 2010)

My search found this 

http://canadianmoneyforum.com/showthread.php/16376-Dividend-Portfolio?p=201482&viewfull=1


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## james4beach (Nov 15, 2012)

Thanks, that thread is pure gold... and covers the heart of the debate.


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## fatcat (Nov 11, 2009)

leoc2 said:


> My search found this
> 
> http://canadianmoneyforum.com/showthread.php/16376-Dividend-Portfolio?p=201482&viewfull=1


thats it, good work


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## Moneytoo (Mar 26, 2014)

Just re-read the series of Couch Potato articles from 2011 (!), debunking various dividend investing myths: http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1. Loved the conclusion of the second one:

"Instead, we would all do well to emulate the discipline, cost consciousness and other good habits of dividend investors. No matter what strategy you use, if you can get that part right, you’ll reach your financial goals."

Looking at PG Vs. JNJ (as a substitute for bonds - have read that dvidend stocks are not “bonds with growth”, duly noted ) In addition to more Apple and VTI, not instead of...


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## agent99 (Sep 11, 2013)

An easier and perhaps safer way to get 5.7% from banks, may be to buy a split preferred like PIC.PR.A. I bought quite a bit at $15.00 with 5.75% yield. Trading now at 15.20. Yield 5.67%. It is retractable, so there is a high probability of you getting your initial investment back. 

With banks having produced, on average, double digit Total Returns over past 15 years, this is just a defensive fixed income like investment for us. We also hold individual stocks for all the major banks. I have a small amount of PIC.A but would not recommend it!


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## james4beach (Nov 15, 2012)

agent99 said:


> An easier and perhaps safer way to get 5.7% from banks, may be to buy a split preferred like PIC.PR.A. I bought quite a bit at $15.00 with 5.75% yield. Trading now at 15.20. Yield 5.67%. It is retractable, so there is a high probability of you getting your initial investment back.
> 
> With banks having produced, on average, double digit Total Returns over past 15 years, this is just a defensive fixed income like investment for us. We also hold individual stocks for all the major banks. I have a small amount of PIC.A but would not recommend it!


^ That's bad advice. See that's *exactly* the kind of mistake people keep making, searching for something exotic and high yielding instead of sticking to the basics.

Why buy something exotic like that when you can just buy the sector ETF and be done with it? As I pointed out, you get a high enough "yield" my way. No exotic securities, no exotic structures, no weird caveats in the fund.


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## agent99 (Sep 11, 2013)

james4beach said:


> ^ That's bad advice. See that's *exactly* the kind of mistake people keep making, searching for something exotic and high yielding instead of sticking to the basics.
> 
> Why buy something exotic like that when you can just buy the sector ETF and be done with it? As I pointed out, you get a high enough "yield" my way. No exotic securities, no exotic structures, no weird caveats in the fund.


It's not bad advice. In fact split prefereds are a very safe way to invest. Similar to buying a fixed income corporate bond, your capital is at very low risk. When buying the sector ETF, your capital is at risk and Total Return is not guaranteed. 

Just like any investment including ZEB, you need to read and understand the prospectus. 

Sell shares in dribs and drabs and odd lots at whatever the market is at the time? Pay multiple brokerage fees and MER. I would consider that bad advice. Were you seriously suggesting that? Would you actually do that yourself??

BTW, I have owned PIC.PR.A and one other split preferred for about 12 years. Nice safe FI-like income.


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## Moneytoo (Mar 26, 2014)

agent99 said:


> It's not bad advice.


No, it's not. Here's from a fresh globe investor article, Advice for investors choking on low interest rates:

"So keep almost all your bonds and *consider an incremental move into dividend stocks, preferred shares or high yield bonds* to boost your overall yield. A move like this makes more sense now than it did before."


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## fatcat (Nov 11, 2009)

preferred shares in stable large-cap companies give income, safety (they come ahead common shares in liquidation) and the dividend tax credit

they are perfectly acceptable for a small allocation of capital especially for high-earners

the problem with preferreds for most investors is that they are arcane


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## andrewf (Mar 1, 2010)

Moneytoo said:


> No, it's not. Here's from a fresh globe investor article, Advice for investors choking on low interest rates:
> 
> "So keep almost all your bonds and *consider an incremental move into dividend stocks, preferred shares or high yield bonds* to boost your overall yield. A move like this makes more sense now than it did before."


Sounds like another example of what I will call the yield fallacy. That you need to invest a certain way to achieve a particular yield, rather than investing for the best risk-adjusted after tax total return and generating cash flows as necessary.


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## fatcat (Nov 11, 2009)

andrewf said:


> Sounds like another example of what I will call the yield fallacy. That you need to invest a certain way to achieve a particular yield, rather than investing for the best risk-adjusted after tax total return and generating cash flows as necessary.


a very good and important point but i don't see any problem with investors who really need income to tweak a portfolio a bit to increase cash flow


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## Moneytoo (Mar 26, 2014)

andrewf said:


> Sounds like another example of what I will call the yield fallacy. That you need to invest a certain way to achieve a particular yield, rather than investing for the best risk-adjusted after tax total return and generating cash flows as necessary.


So you really think j4b's advice in the OP was better? And would consider doing it yourself? Personally, I won't - and think agent99 gave a more realistic advice, so posted an article to support his post (and unanswered questions):



agent99 said:


> It's not bad advice. In fact split prefereds are a very safe way to invest. Similar to buying a fixed income corporate bond, your capital is at very low risk. When buying the sector ETF, your capital is at risk and Total Return is not guaranteed.
> 
> Just like any investment including ZEB, you need to read and understand the prospectus.
> 
> Sell shares in dribs and drabs and odd lots at whatever the market is at the time? Pay multiple brokerage fees and MER. I would consider that bad advice. *Were you seriously suggesting that? Would you actually do that yourself??*


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## andrewf (Mar 1, 2010)

I think james is essentially right. I would not recommend doing it with sector funds. I would lean toward a decently balanced portfolio of global equities and fixed income. I would not have a disproportionate share of my portfolio in pref shares just to hit a yield number. I'm not convinced that pref shares offer a very attractive risk adjusted return.


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## Moneytoo (Mar 26, 2014)

andrewf said:


> I would lean toward a decently balanced portfolio of global equities and fixed income. I would not have a disproportionate share of my portfolio in pref shares just to hit a yield number.


No arguments with this part, but if I had to chose between what James suggested and preferred shares - I'd choose preferred shares (especially if I had a small-ish portfolio - the trading fees alone would kill the returns!)


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## andrewf (Mar 1, 2010)

I would not say so. Nothing says you have to sell a little bit every 2 weeks to make a mock-paycheque. That is just the yield fallacy again. You could sell once per year your 2% top-up and keep it in your savings account.

I help my parents with their investment portfolio. They take a cash distribution from their investment portfolio once a year around the time they rebalance their holdings and stick it in the savings account, which is gradually transferred over to chequing to match their spending. Worst case, if they need more cash due to unexpected expenses, they could draw more before the next rebalancing, but this has not come up.


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## Moneytoo (Mar 26, 2014)

Well hopefully by the time we need income, regular bonds will be yielding 5%+, so for me at this point it's just a hypothetical discussion







We have 4% of total portfolio in bonds and 5% in preferred shares, most of the rest are in equities (individual stocks and ETFs) 

I didn't even know how much our portfolio is "earning", thought it was couple thousand dollars since last summer - and to my surprise it's almost 5K for the first half of this year! The biggest one-time payment was from XEF, developed ex-North American countries ETF (but my husband has 30K+ of it - and will have even more after he transfers his People's Trust TFSA to Questrade)

So we'll keep saving, investing, learning and experiment, and hopefully one day will be able to live off of it - will do the math when the time comes what method is better...


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## gibor365 (Apr 1, 2011)

agent99 said:


> An easier and perhaps safer way to get 5.7% from banks, may be to buy a split preferred like PIC.PR.A.


In split "world" I like DFN.PR.A ... much higher volume than others include PIC.PR.A and it's not only banks.... Want to buy on small pullback, but it's going up and up


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## humble_pie (Jun 7, 2009)

i think it was david rosenberg where i read it first. That dividend yield had diverged so crazily from interest rates that one of 2 things would have to happen: 1) interest rates would have to rise; or 2) dividend yields would have to fall.

that was couple years ago. Rates have continued to fall, so since then the divergence between divvy yields & rates has turned crazier than ever. A phenom that never happened before in history.

finally, though, we've recently entered a period of reversing at least some dividend yields. Shares in companies that've already cut their divvies have fallen. Other companies that still pay pricey at-risk dividends seem to be waiting in a hidden queue for the guillotine chop.

i suppose everything will flatten eventually? in the meantime, where are the lowered consumer prices we should be seeing?


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## agent99 (Sep 11, 2013)

gibor said:


> In split "world" I like DFN.PR.A ... much higher volume than others include PIC.PR.A and it's not only banks.... Want to buy on small pullback, but it's going up and up


I don't know about going up and up! Most of these prefereds are trading at higher than their face value, but only because their coupon interest rate is high compared with bonds etc. They do go up when there is demand for their high yield. 

DFN.PR.A has had a range of $10.08 to $10.39 over past 52 weeks. Issued at $10.00, 5.25% yield. Now $10.29, 5.1% yield.
The ones I presently own, PIC.PR.A yields 5.66% and PVS.PR.A 4.88%.

With fixed income rates so low, split preferreds and a few convertible debentures seem only way I know of to get reasonable yield with relatively low risk.

But open to other ideas. Perhaps in a separate thread seeing this one is about banks. I have about $80k in cash from maturing bonds looking for an answer


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## mrPPincer (Nov 21, 2011)

5% seems pretty good right now, but didn't preferreds drop along with everything else in the 08/09 crash?



> But open to other ideas. Perhaps in a separate thread seeing this one is about banks. I have about $80k in cash from maturing bonds looking for an answer


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Just a suggestion, anyways, that's where I'm keeping my cash at the moment.

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So, if you or anyone wants to use an Orange Key for the bonus, you are more than welcome to use mine, my Orange Key is 42304374S1

edit: (Second last is an S as in Sam, not a five)


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## agent99 (Sep 11, 2013)

mrPPincer said:


> 5% seems pretty good right now, but didn't preferreds drop along with everything else in the 08/09 crash?


The market value of split or retractable prefereds doesn't really matter. You hold them for the income, and like bonds, you can get the full face value at maturation or when you retract. The yield quoted allows for fact that you might buy at say $10.20 and get $10.00 when retracted.


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## HaroldCrump (Jun 10, 2009)

humble_pie said:


> in the meantime, where are the lowered consumer prices we should be seeing?


Why should there be lower consumer prices...I'd expect quite the opposite.
Our currency has fallen nearly 30% in last year & half.
We have not benefited at all from falling crude oil prices.
Up until May, Canada had over $3B in trade deficit (down below $0.5B in June).

No reason to expect lower consumer prices.


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## james4beach (Nov 15, 2012)

Forget 2008; preferred shares are plummeting right now.

5% yield doesn't do you much good when you're down -20% in a year.


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## pacman (Sep 6, 2009)

agent99 said:


> DFN.PR.A has had a range of $10.08 to $10.39 over past 52 weeks. Issued at $10.00, 5.25% yield. Now $10.29, 5.1% yield.
> The ones I presently own, PIC.PR.A yields 5.66% and *PVS.PR.A 4.88%*


PVS.PR.A matures in March 2016, so is a very short term play.
I've held PVS.PR.A until just recently, but switched to PVS.PR.C with a yield of 4.8% (longer maturity)
I also have a large holding of DFN.PR.A, and watch all 3 stocks closely.

pacman


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## agent99 (Sep 11, 2013)

james4beach said:


> Forget 2008; preferred shares are plummeting right now.
> 
> 5% yield doesn't do you much good when you're down -20% in a year.


It makes no difference for retractable preferreds. And as a result, all the ones I know of are trading at above their issue price.


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## agent99 (Sep 11, 2013)

pacman said:


> PVS.PR.A matures in March 2016, so is a very short term play.
> I've held PVS.PR.A until just recently, but switched to PVS.PR.C with a yield of 4.8% (longer maturity)
> I also have a large holding of DFN.PR.A, and watch all 3 stocks closely.
> 
> pacman


That is true. Still not a bad yield for a short term investment. 

I was mixed up with the symbols - Shouldn't rely on memory  Especially since they switched from BNA.PR.x The shares I have are actually Series 3 - PVS.PR.B with maturity in 2019 (if not redeemed). Current yield about 4.35%, but I bought when share price was about $21.50 and yield was higher than the Series 5 (C)

I should take another look at DFN.PR.A. 

Any other split or retractible preferreds owned by forum members?


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