# How is it possible for DFN to earn 10%+ yield?



## dubmac

Quick question to the forum.
DFN is composed of around 15-20 stocks - all CDN, and mostly banks and dividend champions. Solid,secure blue chips. (see description below).
Those companies have yields in the 3-5% range - none in the 10% range.
My simple question is:

How can this fund produce a 10% yield when all of the stocks that compose the fund earn yields well below 10%?

I would expect the fund to "dry up" and begin dropping in value with time as the assets were whittled away in dividend distributions. 

Can anyone shed some light on this for me?




Dividend 15 Split Corp. is a Canada-based investment fund designed to pay monthly cash dividends. It offers two types of shares: Class A and Preferred. The Fund provides holders of the Class A Shares with regular monthly cash dividends initially targeted to be $0.10 per Class A Share to yield 8.0% per annum on the original issue price. It provides holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends in the amount of $0.04375 per Preferred Share to yield 5.25% per annum on the original issue price. It primarily invests in portfolios of 15 Canadian companies: Bank of Montreal, National Bank of Canada, Sun Life Financial, Bank of Nova Scotia, CI Financial Corp., TELUS Corporation, CIBC, BCE Inc., Thomson Reuters Corporation, Royal Bank, Manulife Financial, TransAlta Corporation, Toronto-Dominion Bank, Enbridge Inc. and TransCanada Corp.


----------



## brad_g

Because they're a strange kind of hybrid product called "split shares", made of capital and preferred shares. The preferred shares get all the dividends but less of the capital participation. The capital shares are a kind of leverage of the overall portfolio and get none of the dividends.

That's the extent of my limited understanding of them. A much better explanation can be found here http://www.theglobeandmail.com/globe-investor/investor-education/ups-and-downs-of-doing-the-splits/article622696/

And directly related to DFN: http://www.theglobeandmail.com/globe-investor/investor-education/clearing-up-the-confusion-over-split-shares/article623174/


----------



## james4beach

There's a must-read article for all CMF'ers, The Income Illusion

Short answer... it's possible for anything to have a 10% yield. I can put cash in a savings account, earn 1% on my cash, and pay you out "10% yield". And people would marvel at how my cash yields 10%.

Find the performance figures for the fund. Then compare it to relevant comparison points, which would likely be XFN since it appears to be heavily financial weighted. Or compare to their actual holdings.

e.g. I found in a past annual report, Class A share performance by year ending Nov 30
2012: 18.04% (this is Nov 30, 2011 to Nov 30, 2012)
2013: 39.44%
2014: 18.92%

Now using stockcharts, which is aware of total return net of dividends, I compare to XFN for those periods:
2012: 21.1% (this is 3% better)
2013: 27.9% (-11% worse)
2014: 16.9% (-2% worse)

So it seems to me the performance is similar, but better than XFN. Without looking into it in too much more detail, I'd say it looks like the fund has done a good job at picking some well performing stocks.

I don't think that yield factors into it


----------



## james4beach

brad's explanation seems more relevant here.

I didn't realize they're one of these exotic share structures. It explains why the Class A (capital shares) exhibit a leveraged effect; in good years they do really well, and in bad years they do worse than the benchmark.

The G&M article says Capital Shares are for "suckers".

For example in the period Nov 30, 2007 - Nov 30, 2008, the class A (capital shares) fell -55.37% as a total return. In comparison, XIU fell -29.9%

So in this bad year, the leveraged effect caused underperformance to the tune of -25%. That's a really horrible under-performance


----------



## gibor365

Looking at appreciation + dividends for 10 years, looks like DFN and XFN are very similar.... DFN is probably convenient for retired as they pay stable 10 cents dividend every month


----------



## humble_pie

i don't believe the DFNs are split between capital & dividend beneficiaries. I believe they are split between a common class that benefits from the heavy options trading & a preferred class whose dividend is far more protected, according to the prospectuses.

there has been a thread about DFN vs DFN.PR.A. A few years ago. The company was in the process of a secondary share offering so that it could continue to pay out high dividends on the common (james4beach is right-on-the-money when he says watch out for tricky financial engineering in the structure of all these hybrid offerings.)

at the time, i expressed doubt re the solidity of the option platform. I myself happen to own the preferred dot A shares because these are the shares whose dividend the prospectus binds the company to protect.

in other words, the prospectuses recite that the actual dividends from the 15 blue-chip companies this fund owns - which, as dubmac points out, are more in the 3-5% range - are legally bound to support the preferred shares only, whereas the common share dividend is derived from aggressive option trading.

(black mac, if you would like to have a 10% return on banks, pipelines & telcos via options trading, i can teach you how)
(this high-performance strategy is not going to last you for the rest of your investing lifetime, though)
(a far more sustainable options-with-dividends yield today would be in the 6-7% range)
(this might be worth taking the trouble to master)

as it happens, the last 5 years have been super-bullish for DFN's 15 blue chip stocks. These are the companies whose options the managers write, over-write, hedge, short, etc in order to raise the $$ they pay out as common dividends.

therefore in the recent bull market, the common shares have risen unscathed. Because of the aggressive options return, DFN looks like a star in yield-ranking data bases. But a wise investor should carefully read all the DFN issuing prospectuses, in order to understand how exactly they are obtaining that starry payout on the common.

sooner or later, a hyper-aggressive option trading strategy will usually get into trouble. Very recent years may have favoured DFN common (this security has a short history) but a global market rout - something surpassing a 30-35% drop - will likely end the DFN common dividend. 

the preferred shares are reasonably well protected, though. The propectuses make this crystal clear.


----------



## dubmac

Thanks Humble, Brad & James4 - I suspected that options trading was involved, but was surprised that such a strategy could produce results as these - & so (apparently) consistently - albeit the past 5 year bull mkt has been a gift for employing such a strategy I presume. I checked the performance of DFN during the March 2009 to see how it weathered that drop in fortunes - it was down 50%.



humble_pie said:


> (black mac, if you would like to have a 10% return on banks, pipelines & telcos via options trading, i can teach you how)
> (this high-performance strategy is not going to last you for the rest of your investing lifetime, though)
> (a far more sustainable options-with-dividends yield today would be in the 6-7% range)
> (this might be worth taking the trouble to master)


@Humble - I am interested HP, but I will need to change brokerages to get into options trading. My existing account doesn't acommodate this. I have been nose to the grindstone at work (both boys @ university - the youngest starts at Queens this fall, the older @ SFU) last few months, so I am staring at some bills here that need "payin'". But...I hope to open an account at a brokerage that will let me undertake options trading in the next year. Your offer is a kind one - and thank-you.


----------



## humble_pie

black mac, i'm really happy to hear about your boys at Queen's & Simon Fraser! all will thrive i'm sure, the boys are in great places.

as for the parents, isn't it amazing to think that the long arduous process of child-rearing is nearly over? it took quite a while for this to sink in on me (the bills help to distract one from the truth, i think, which is that they're growing up & either gone or else they will be flying away soon.)

as for options, option sell strategies are good for stable markets or slightly rising markets or slightly falling markets. Such as what we're experiencing in 2015.

what has supported your DFN for the past 5 years has been the nicely rising market tide, with its flotilla of tiny little option sailboats gradually rising higher & higher.

severely correcting markets are options suicide, though, except for the put holders. But then, nobody holds long puts other than lonewolf & a few other eccentrics, right?


----------



## Eclectic12

james4beach said:


> ... For example in the period Nov 30, 2007 - Nov 30, 2008, the class A (capital shares) fell -55.37% as a total return. In comparison, XIU fell -29.9%
> 
> So in this bad year, the leveraged effect caused underperformance to the tune of -25%. That's a really horrible under-performance


It's what leverage is *supposed* to do ... so calling it "under-performance" does not seem reasonable. Where one thinks it's a regular stock - it is horrible.


As I was looking for leverage in early 2009 - that was the point of my interest. As I recall, the leverage made for a much better return when I compared the gains of the direct stock versus the leveraged split shares I bought. Not wanting everything in one basket but wanted to take advantage of what I though would be substantial rebound for financials - I put a percentage into a split share.

Having used split shares in the same way ... the mystery to me was why I was getting a cash payout *at all*. I'll have to check my records but I seem to recall that by the time I sold, the cash payments had returned over 40% of the purchase price.


Bottom line is not knowing there is leverage involved is always bad (i.e. someone who didn't read the details/understand the investment). Knowing there is leverage puts another tool in the toolbox ... should the right situation present itself.


Cheers


----------



## gibor365

> I checked the performance of DFN during the March 2009 to see how it weathered that drop in fortunes - it was down 50%.


 it was down much more than XFN, but still paid same dividend


----------



## Vicjai

i agree with humble_pie that "_sooner or later, a hyper-aggressive option trading strategy will usually get into trouble._ " On an individual investor's pov, I would prefer breaking down the holdings and buying them individually instead (enbridge, bmo, cibc, transalta etc.) because DFN doens't move at all, jsut a dividend collector. But as humblepie mentioned pretty much, sustainability is what's important. With a little active management, you can achieve better return on your investment than the 10% dividend offered by DFN.


----------



## andrewf

One thing to consider is that when the fund was created, the preferred shares likely received most or all of the dividends received from the underlying holdings. However, as those companies increase their dividends, the benefit accrues to the capital shares. The class A shares are only entitled to the yield at inception and no more. That said, it seems the capital shares have been returning some capital to maintain leverage. If they did not, what started as a 40% leveraged fund ($25 in underlying assets for each $10 pref share and $15 capital share) would have declined to much less as the market rose. Since the pref shares are being compensated for a certain level of risk/leverage, it is in the interest of the capital share holders to distribute excess capital to maintain that leverage.


----------



## jmarks

I agree that DFN has a higher risk just based on the current NAV which is short a couple bucks compared to the current price of the DFN + DFN.PF.A. 
As long as they keep issuing new shares that keep getting snapped up quickly, and the market doesn't take a huge correction.

As my high risk day's are behind me I've sold DFN and have been buying the preferred shares as they seem as safe as a bond but a higher yield. I've read the complete prospectus and last few financial reports. 
And am left wondering why the preferred shares aren't in higher demand? Aside from the whole market crashing, I can't see how you can loose money the way this fund structures their funds. Your guaranteed the principal amount of $10 a share so even a 50% drop in fund has DFN.PR.A in the black and you can sell them on the open market or back to Quadravest at $10.

What am I missing here guys? Getting a 5.2% yield with principal protection seems to good to be true, yet I can't find a whole in investment that would cause me to loose my principal.


----------



## andrewf

You have to calculate Yield to Worst (YTW) since the preferreds may be callable/redeemable by the issuer. This is the worst-case yield if the issuer redeems at the most advantageous time for them (and least advantageous time for you). This may or may not be 5.2% yield.


----------



## jmarks

andrewf said:


> You have to calculate Yield to Worst (YTW) since the preferreds may be callable/redeemable by the issuer. This is the worst-case yield if the issuer redeems at the most advantageous time for them (and least advantageous time for you). This may or may not be 5.2% yield.


That's the thing, the DFN.PR shares don't seem to have that feature like most normal preferred shares. The only thing I found in the prospectus that could cause an issue for the preferred holder is the following statement, which seems way out there.

The Company may suspend the retraction or redemption
of Preferred Shares and Class A Shares or
payment of retraction or redemption proceeds during
any period when normal trading is suspended on one
or more stock exchanges on which more than 50% of the 
equity securities held by the Company are listed or
, with the prior permission of the appropriate securities 
regulatory authorities, for any period not exceeding 120 days
during which the Company determines that conditions
exist which render impractical the sale of assets 
of the Company or which impair the ability of the Company 
to determine the value of the assets of the Company


----------



## Eclectic12

^^^^

I believe that's because they are a split share ... not a traditional preferred share.

From what I recall, the idea is that they will run for the time frame setup (usually five or ten years) then be reviewed as to whether to continue or be wound up. They've become more complicated but the simple version from around the early 2000's was that the preferred shares were less expensive than the common stock but paid a higher dividend. The capital shares were also cheaper but would receive all of the capital growth.

The main "recall" by the fund company for a split share structure is for one set date (ex. setup in June 2015, potential windup was the set date of June 2020). Another difference is that if the vote or management decision was for a windup then both the capital *and* the preferred shares would be wound up (i.e. the whole fund company).

The investor had to keep the windup date in mind but was able to either:
1) tie up less money to receive more cash payments than the common stock paid (i.e. preferred share), with downside protection.
2) tie up less money to receive all the capital growth on a leverage basis.

Or if they were able to accumulate enough capital + preferreds to end up in a favourable arbitrage situation.


For example, DFN & DFN.PR.A have a windup date of Dec 1st, 2019. Now most of the windup dates I've watched, the fund company is making money & the investors are happy ... so the vote had usually ended up with another five year term being setup instead of a windup.


Cheers


----------



## humble_pie

thankx to all for the updates.

the preferred shares took a small tumble & suddenly started trading at roughly 3X previous volumes about 2 weeks ago. I imagine the tumble was related to interest rate hike anxiety?

the significantly higher trading volumes - more than half a million shares today - suggest institutional acquisition. If so, we would have a rare situation where both the institutions & jmarks are thinking along the same lines, but our intrepid member got to home plate first.

this is an unusual pattern. Normally the institution(s) would quietly conduct their home run(s) & a few lucky investors would catch on either while the home run was in progress or else soon afterwards.

jmarks asks why this preferred isn't being appreciated more? i agree, the underlying stocks are stable & the total structure is skewed to protect the preferred dividends. The probability of TSX meltdownageddon for the 15 stocks is almost non-existent, although near-meltdown would likely cut their dividends. IE there is risk, this preferred is not as safe as a quality bond, the company has an opt-out clause that allows them to sidestep regular share $10 buyback episodes under meltdown conditons, as jmarks has shown upthread in message No. 15.

all things considered, north of 5% with a soupçon of risk but nice dividend tax credits is still better than GICs, imho.


----------



## jmarks

^^^^^
Absolutely there is risk, hence the 5.2% return. However the risk appears minimal and worth the extra yield (pfd3 rating on preferred's). 
Notes:
- Recent offering (~2 wks ago) for 4.3m combined shares was snapped up the same day they became available, I couldn't get any through iTrade as they where gone.
- High volume is coming from the Banks. 
- They may be flipping shares to make a few % off the newly issued preferred's (Market price was around $10.40 new issue priced at $10)
- Current NAV is more than 50% away from impacting divy to PR shares.
- During 08' the PPS dropped about 28%, the fund's end date was Dec. 2009 at that point so it could have been a lot uglier.
- Dividends for the preferred's never stopped during 08' or ever for that matter. The common share divy was suspended for a number of months but not long.
- Total fee's are around 1.2% all in, not cheap but not in CND Mutal Fund territory.
- Call/Windup date is December 1, 2019. So entry timing is good.

So I agree risk/reward seems pretty decent, a good place to park my cash and get a real return. 
I just wanted the community to chime in to see if I missed anything on the structure of this fund.


----------



## dubmac

jmarks said:


> - Total fee's are around 1.2% all in, not cheap but not in CND Mutal Fund territory.
> - Call/Windup date is December 1, 2019. So entry timing is good.
> I just wanted the community to chime in to see if I missed anything on the structure of this fund.


What happens on Dec 2 2019 (after wind-up)? Fund dissolved and proceeds to investors I would expect.


----------



## gibor365

So, does somebody hold this equity?


----------



## thepitchedlink

I don't own it yet, a good buddy does and keeps steering me towards it...but I've never had a good grasp of how it works....so have avoided it. This is a good thread , keep it going guys


----------



## gibor365

thepitchedlink said:


> I don't own it yet, a good buddy does and keeps steering me towards it...but I've never had a good grasp of how it works....so have avoided it. This is a good thread , keep it going guys


This is the point ... I don't really understand it ... on other hand they didn't cut dividends through last recession ...


----------



## dubmac

gibor said:


> This is the point ... I don't really understand it ... on other hand they didn't cut dividends through last recession ...


I'm trying to figure this one out too Gibor. I've been reading some of the links provided, I'm finding these split-shares to be somewhat unusual


----------



## thepitchedlink

They haven't missed that .10 payment , even through 2008......I can't get my head around it


----------



## dubmac

thepitchedlink said:


> They haven't missed that .10 payment , even through 2008......I can't get my head around it


correct me if I'm wrong but given the price of DFN was down around $5:10, then the yield must have been around 25% (not including inflation!)


----------



## gibor365

Yes, yield was just below 24% about 4 months and no dividend cut!
I;m curious if similar funds exist on NYSE?


----------



## gibor365

btw, DF (Dividend 15 Split Corp II) also always paid same 0.1 dividend and has 14% yield


----------



## dogcom

I haven't looked into it but you also have DGS which also follows a similar path and has taken the same recent dip that DFN has taken.


----------



## pacman

gibor said:


> So, does somebody hold this equity?


Well, yes, I guess I am one of the few here who do own the preferred DFN.PR.A. As others have said, the NAV would have to drop by over 50%, and the preferreds would still be in the black. I can't figure out why it isn't more popular. I also own DGS.PR.A, a similar split/preferred product from Brompton Funds. I also own some of the Partners's Value Split shares, which are 100% valued from the BAM capital shares. These preferreds have almost an 80% downside protection right now. My portfolio consists of about 75% of these 3 split shares.

I should add that I am in my mid 50's and am in "semi retirement" (reduced hours), and am very happy with a ~ 5% return


----------



## dubmac

pacman said:


> I am one of the few here who do own the preferred DFN.PR.A. I also own DGS.PR.A, a similar split/preferred product from Brompton Funds.


pacman - what happens to the DFN fund when it wraps up in Dec 2019? - does it affect your DFN.PR.A. How did you buy DFN.PR.A? - I don't see it available on Google finance.


----------



## pacman

dubmac said:


> pacman - what happens to the DFN fund when it wraps up in Dec 2019? - does it affect your DFN.PR.A. How did you buy DFN.PR.A? - I don't see it available on Google finance.


https://www.google.ca/finance?q=TSE:DFN-A&hl=en&gl=ca&ei=6dJrVcH8Fcb6iwLbh4G4BQ

The preferred shares will mature at $10.00 in Dec 2019. The payout is not affected by DFN 
The DFN capital shares will be paid out at the Nav less prefer shares. I don't own those.
purchased like any stock on tsx.
volume is pretty thin most days

I should have also added that the beta is very low, close to zero, which I like in my situation.
The price is almost always around $10.10 - $10.30
They have recently dropped below that because of the new recent issue (at $10.00)


----------



## gibor365

So DFN will discontinued on Dec 2019?


> The DFN capital shares will be paid out at the Nav less prefer shares


 and how muvh per share is shoud be?

DGS.PR.A


> The investment objectives for the preferred shares are to provide holders with fixed cumulative preferential quarterly cash distributions currently in the amount of $0.13125 per preferred share, representing a yield on the original issue price of 5.25% per annum and to return the original issue price to holders of preferred shares on the maturity date of the Company, November 28, 2019.


 So, you gonna get $10/share in Npv 2019 and until than you are pretty much guaranteed 5.2% yield? Sounds not bad....



> guess I am one of the few here who do own the preferred DFN.PR.A


 Why not DFN?


----------



## gibor365

I'm also curious how rising interest rates are going to affect equities like DFN, DFN.PR.A, DGS.PR.A ? Are DFN.PR.A, DGS.PR.A more secure than short term bonds in this case?


----------



## jmarks

gibor said:


> So DFN will discontinued on Dec 2019?
> and how muvh per share is shoud be?
> 
> DGS.PR.A So, you gonna get $10/share in Npv 2019 and until than you are pretty much guaranteed 5.2% yield? Sounds not bad....
> 
> Why not DFN?


I own it as well, and looking to add to my position.

How much DFN's shares will be in 2019 will be based on NAV and demand for the product just like any other security. If the combined NAV goes below $15 dividends are suspended until the NAV is above $15, which would have an affect on pps!

DGS.PR.A same kind of fund with a different nuances in the prospectus and tax treatment on the common's. One really needs to go through each prospectus to look for the fine print.

Why not DFN? Looks like a decent bet right now combined trades at 10% below NAV which is one of the best of the bunch right now (that I could find). It's much riskier to buy the commons and MANY more things can change the pps fast. Having said that people in 2008 watched the pps drop like a rock, then their dividends where suspended. A few months later dividends where paid again and they are looking good now.

For what its worth both Quadravest and Brompton issued new shares recently. DFN was sold out immediately and it took a while to sell out the Brompton (DGS) issue (iTrade).


----------



## thepitchedlink

jmarks said:


> I own it as well, and looking to add to my position.
> 
> How much DFN's shares will be in 2019 will be based on NAV and demand for the product just like any other security. If the combined NAV goes below $15 dividends are suspended until the NAV is above $15, which would have an affect on pps!
> 
> DGS.PR.A same kind of fund with a different nuances in the prospectus and tax treatment on the common's. One really needs to go through each prospectus to look for the fine print.
> 
> Just to be clear, you own the DFN, or the Pref? Do you folks hold these in Reg accounts or Non? My limited understanding is the the Pref should be held in Non......
> 
> Thanks much, interesting thread


----------



## gibor365

> My limited understanding is the the Pref should be held in Non......


 I think it's prefferable to hold preffered  in non-reg, but you can hold it in reg too ....



> If the combined NAV goes below $15 dividends are suspended until the NAV is above $15


 so, during last big recession NAV didn't go below $15?
From what I understand, DFN.PR.A dividends are much more secure.... right?


----------



## thepitchedlink

From what I understand, DFN.PR.A dividends are much more secure.... right?[/QUOTE]

That's my understanding, the Pref is much more protected then the common....in fact, I think the concept here is that if the market tanks, the Pref will "feed off "the common, to keep paying the Pref. The Common could go to zero with no div being payed, but the Pref will survive unless the company actually tanks as well. At least I think that's how it's set up.....


----------



## Albert

I hold BBO.PR.A, which is composed of banks, oil and gas. Have been collecting over 5% dividend for several years, paid $10.15 and has moved very little over the years. Redemption date is Dec 31, 2016, at the time I should get $10. I can not find any negatives for someone retired like me looking for income. 
I wanted to buy more, but it seems to good to be true compared to other safe investment out there. I ask the same question that others have asked. Why is there so little interest in this?


----------



## gibor365

> Why is there so little interest in this?


 Probably because majority of investors aren't aware of those equities at all? I'm about 5 years on this forum, but don't remember they were discussed... even on BNN nobody talking about it....



> Redemption date is Dec 31, 2016, at the time I should get $10


 and it doesn't matter if interest rates going up or down, you still gonna get $10/share... btw, how it's working ? Automatic redenption back to your account? Any trading fees or it's free?


----------



## jmarks

gibor said:


> I think it's prefferable to hold preffered  in non-reg, but you can hold it in reg too ....
> 
> so, during last big recession NAV didn't go below $15?
> From what I understand, DFN.PR.A dividends are much more secure.... right?


Sorry I've never figured out this multi Quote tool 

I've owned both, but only hold the preferred's at this time, although I believe it is a decent time to enter DFN if you don't mind the added risk. 

Due to lower taxes on dividends it is more advantageous to hold in a cash account, but that's your choice.

My mistake it was DF that had the divy cut for 6 months (sorry same company) and basically the same fund.

No the NAV on DFN did not drop below $15, but the combined share price dropped to $12.80. They never cut the divy on DFN (just checked) the NAV on DFN was around $16.80 on Nov.2008, but looks like a LOT of people jumped on the Bandwagon and bailed.

Yes the DFN.PR.A shares are more secure as they get first rights to the assets if the fund runs into trouble or winds up. Having said that any preferred share is not as secure as a Bond or GIC. But with Bond pricing the way it is lately you could easily loose $ on Bonds but not a lot if they are highly rated.


----------



## gibor365

> Yes the DFN.PR.A shares are more secure as they get first rights to the assets if the fund runs into trouble or winds up. Having said that any preferred share is not as secure as a Bond or GIC. But with Bond pricing the way it is lately you could easily loose $ on Bonds but not a lot if they are highly rated.


 Obviously "any preferred share is not as secure as GIC", but comparing to bond ... imho it depends a lot on bond rating and preferred stock rating... 
I doubt that BBB bond rating is more secure than AA+ or AAA preferred stock rating.

Is any significant difference between DFN.PR.A and DGS.PR.A?


----------



## dubmac

Would DFN-A be a good stock/fund to have in a TFSA to trundle along and produce some cash (to buy other more growth-related stocks). Just wondering whether any, other than pacman who draws down of the difstributions as part of his retirement strategy, undertake a strategy as this?


----------



## pacman

gibor said:


> Is any significant difference between DFN.PR.A and DGS.PR.A?


Very similar products.
both rated PFD-3
DFN.PR.A matures Dec 1/19. DGS.PR.A matures Nov 29/19
DFN.PR.A pays monthly divs. DGS.PR.A pays quarterly divs
DFN.PR.A currently about a 50% downside protection. DGS.PR.A currently about a 45% downside protection.


----------



## pacman

Albert said:


> I hold BBO.PR.A, which is composed of banks, oil and gas. Have been collecting over 5% dividend for several years, paid $10.15 and has moved very little over the years. Redemption date is Dec 31, 2016, at the time I should get $10. I can not find any negatives for someone retired like me looking for income.
> I wanted to buy more, but it seems to good to be true compared to other safe investment out there. I ask the same question that others have asked. Why is there so little interest in this?


I owned BBO.PR.A for a while also. There wasn't much volume on that stock, and also, the downside protection is a little less at about 43%, so i switched over to the DFN.PR.A and DGS.PR.A
I also trade these a little if I see them getting too high or too low, so I like the fact there is some volume, especially on the DFN.PR.A


----------



## gibor365

Van you DRIP shares?


----------



## pacman

gibor said:


> Van you DRIP shares?


Nope, these don't DRIP.


----------



## gibor365

pacman said:


> Very similar products.
> both rated PFD-3.


Are there similar products with higher rating?


----------



## thepitchedlink

Is there an MER associated with this product? I must not be looking very hard on the Split Corp site....


----------



## jmarks

thepitchedlink said:


> Is there an MER associated with this product? I must not be looking very hard on the Split Corp site....


Yes there is a MER of 1.2% on DFN/DFN.PR.A. You'll need to go to SEDAR to see all the nitty gritty details.

I still can't find a thing wrong with DFN.PR.A, especially given they are quite liquid and the spread on the bid/ask is usually only a couple pennies. No rate reset, no early redemption, short term (Dec.,2019) guaranteed to get $10 back after collecting 5.2%. What's not to like if your looking for a safe place to make a few $$

I'm happy with a PFD-3 rating as most of the underlying assets are PFD-1. I assume the risk comes in with Quadravest as a third party controlling the underlying assets. Don't know if any others have a higher rating. 
Hopefully others are having a look around at this type of investment and can chime in.


----------



## gibor365

jmarks said:


> ...only a couple pennies. No rate reset, no early redemption, short term (Dec.,2019) guaranteed to get $10 back after collecting 5.2%. What's not to like if your looking for a safe place to make a few $$


I just think that some investors are not satisfied with 5.2% yield, when you can buy dividend aristocrat like T:NYSE with 5.5% yield + 2-3% increase every year


----------



## andrewf

The underlying assets are not preferred shares, so it's not accurate to say they are all PFD-1.


----------



## pacman

gibor said:


> I just think that some investors are not satisfied with 5.2% yield, when you can buy dividend aristocrat like T:NYSE with 5.5% yield + 2-3% increase every year


I've always thought of the preferred side of the split shares more of a fixed income type investment. There is no upside to DFN.PR.A. 
I don't think you can really compare it with a dividend ETF or Mutual Fund. It would be more comparable to a true preferred share or bond ETF.

It the stock market tanks by 50%, a dividend ETF is going to tank along with it (although maybe not 50%)
My guess is that DFN.PR.A might drop 10% with a 50% market drop.

As I mentioned before, I am very happy with a 5% return for the remainder of my investment life, although I do admit, I still have maybe 10-20% of my total portfolio in equities.


----------



## pacman

gibor said:


> Are there similar products with higher rating?


PVS.PR.A, PVS.PR.B, PVS.PR.C, and PVS.PR.D are all rated PFD-2L
These are not exactly like DFN.PR.A, but they are similar in that they provide a "guaranteed" payout at maturity (1-7 years).
The underlying stock, BAM, could take a 80% hit, and these prefs would still be in the black.
I've owned all of them over the past few years, and still own the 2 shorter term ones. Current yield is 3-5%, depending on maturity.


----------



## jmarks

andrewf said:


> The underlying assets are not preferred shares, so it's not accurate to say they are all PFD-1.


Your absolutely correct!! Mind not on task!


----------



## gibor365

pacman said:


> PVS.PR.A, PVS.PR.B, PVS.PR.C, and PVS.PR.D are all rated PFD-2L
> These are not exactly like DFN.PR.A, but they are similar in that they provide a "guaranteed" payout at maturity (1-7 years).
> The underlying stock, BAM, could take a 80% hit, and these prefs would still be in the black.
> I've owned all of them over the past few years, and still own the 2 shorter term ones. Current yield is 3-5%, depending on maturity.


The volume on PVS.PR is extremely light


----------



## Canuck

Can you get in and out of DFN.PR.A just like you can a regular stock? 

And are the dividends 100% "eligible"? and does it truly pay 5.1% or is there a MER that I'm not aware of that would knock that yield down?

Also, on Dec 2019 do they just automatically deposit $10 for every share you own as cash back into your account, or ?

I've never bought preferreds before and I'm unclear on some of the documents I'm seeing on their site.

This seems like a great avenue for me, I'm trying to be a bit safer and deposited a bunch of cash into TD's TDB8150 at .75% ... it's driving me crazy. I'd be willing to take on minimal risk for 5% 

Thanks for your help!


----------



## james4beach

pacman said:


> It the stock market tanks by 50%, a dividend ETF is going to tank along with it (although maybe not 50%)


Or perhaps more, which is what happened to US preferreds during the last bear market.

The investment world is littered with interesting and exotic oddities, many of which have ruined lots of investors. I caution everyone about investing in something unless they understand all the ins and outs.

Just fully understanding stocks and bonds is tough enough. Index ETFs aren't much more exotic but even they are full of pitfalls and weirdness.

This thing though? I have no clue ... I wouldn't touch it with a 10 foot pole.


----------



## Canuck

and is LFE.PR.B similar to DFN.PR.B ? can't seem to find any info on it.


----------



## gibor365

Canuck said:


> Can you get in and out of DFN.PR.A just like you can a regular stock?
> 
> And are the dividends 100% "eligible"? and does it truly pay 5.1% or is there a MER that I'm not aware of that would knock that yield down?
> 
> Also, on Dec 2019 do they just automatically deposit $10 for every share you own as cash back into your account, or ?
> 
> I've never bought preferreds before and I'm unclear on some of the documents I'm seeing on their site.
> 
> This seems like a great avenue for me, I'm trying to be a bit safer and deposited a bunch of cash into TD's TDB8150 at .75% ... it's driving me crazy. I'd be willing to take on minimal risk for 5%
> 
> Thanks for your help!


Yes, you can buy and sell like any stock.... and DFN.PR.A is pretty liquid, I recently added this equity to my portfolio..... I liked that even during 2008-9 recession they didn' cut dividends
Take a look at thread below... I published replies of issuers on my email with similar questions...
you also can send them email, they answer fast and in details
http://canadianmoneyforum.com/showt...tween-DFN-PR-A-and-DF-PR-A?highlight=dfn.pr.a



> I caution everyone about investing in something unless they understand all the ins and outs.


 do you really understand all ins and outs of pure stocks?! What about VRX?!


----------



## james4beach

gibor said:


> do you really understand all ins and outs of pure stocks?! What about VRX?!


Yes I was fully aware of the risks buying my 3 shares of VRX


----------



## Canuck

gibor said:


> Yes, you can buy and sell like any stock.... and DFN.PR.A is pretty liquid, I recently added this equity to my portfolio..... I liked that even during 2008-9 recession they didn' cut dividends
> Take a look at thread below... I published replies of issuers on my email with similar questions...
> you also can send them email, they answer fast and in details
> http://canadianmoneyforum.com/showt...tween-DFN-PR-A-and-DF-PR-A?highlight=dfn.pr.a
> 
> do you really understand all ins and outs of pure stocks?! What about VRX?!


Thanks Gibor.

"Both are non-callable and will not be called before December 1, 2019. Both funds are subject to further five year extensions beyond December 1, 2019. However should the termination dates be extended, shareholders would be offered a special retraction option using the same formula as windup."

If an extension was offered, would you just continue holding, or would they deposit cash in your account ($10) and you would have to purchase the new offering again?

the wording in the quote above is confusing to me. 

Can I ask what % of your portfolio you have in this? It seems like low trade volume, so I may gradually add to it over this year, but I'm a bit worried that if I accumulate too many shares I may have an issue selling if I needed to in a hurry. Although, looking at the chart, it appears to be super steady, and having to sell in a hurry is maybe not a concern.

Are management fees calculated before the 5.2% return, I'm also unsure about how those are paid. Typical stock trader here, I've never owned anything that had a MER. I'm looking for an alternative to the basics but with no ROC or taxable income, only eligible dividend income.

Is this the only Split preferred that you own?


----------



## andrewf

Effectively it is the capital shares that pay the MER, since the pref shares have a fixed coupon. If the fund if extended past 2019 you will have the option of tendering the pref shares for $10.


----------



## Canuck

thanks Andrew


----------



## gibor365

> Can I ask what % of your portfolio you have in this?


 for now it's very very small allocation...planning to add in future


----------



## Mayday

*DF. TO*

I'm curious with regards to Dividend 15 Split ii. As the dividend will not be paid for the month of January and quite possibly the next few months as a result of a NAV value below 5.00, if one were to look at it now simply as a value play and not an income vehicle what risks could be foreseen? It appears to me that these 15 high grades stocks are actually held by the corporation and as such if the share price falls far below the NAV value any long term risk would be minimized. Am I wrong in this assumption?


----------



## humble_pie

^^

perhaps a bit wrong. One would have to read the prospectuses.

with respect to fairly similar DNF & DFN.PR.A, the prospectuses show that the capital will be conserved to pay the dividends of the preferred shares only. It's likely that DF & its preferred share partner are structured the same way.

i've always thought - & continue to say - that both these funds paid a falsely alluring dividend on their common. Investors were lured in by the prospect of "option trading" without sufficient knowledge.

it's true that their prospectuses are dense & difficult to understand. But my view on the common shares of both would be severely prudent. Would be exceptionally cautious. Because, with the capital backing the preferreds, with option trading fading into nothing, what *value* could be left for the common shares as so-called value plays?


----------



## Mayday

Thanks for your response Humble_pie. However with regards to the conservation of capital in order to pay the preferred dividends, isn't this more a factor upon termination of the fund at the end of 2019? Should one have a positive outlook on the holdings within the fund over the next three years would it not be fair to say it's trading at a discount? I hope this makes sense, I'm still relatively new to investing and certainly have no experience with split funds such as these.


----------



## gibor365

> I'm curious with regards to Dividend 15 Split ii. As the dividend will not be paid for the month of January and quite possibly the next few months as a result of a NAV value below 5.00


 Not below 5, but below 15 ....DF NAV for December was 14.51 , so no dividends... interesting that in Sept DF NAV was 14.99, but dividend was still paid. DF.PR.A still pays dividends, what it's threshold ? $10?
DFN looks rather safe now with NAV 17.77


----------



## humble_pie

Mayday said:


> ... Should one have a positive outlook on the holdings within the fund over the next three years would it not be fair to say it's trading at a discount? I hope this makes sense, I'm still relatively new to investing and certainly have no experience with split funds such as these.




mayday you may be "new" but you do have some good ideas!

re DFN dividends, all dividends paid out by the 15 (or more) underlying companies in the holding are being used to pay the preferred share divvies. As the manager, Quadravest, says on its website:

_"The dividends received on the stocks held in a Split Share Fund’s portfolio are used to fund the fixed, cumulative monthly payments made to the Preferred shares. Any excess dividend income plus option premium received from covered call writing is used to fund the targeted monthly payments to the Class A shares.

"The objective is to pay mostly Canadian eligible dividend income to the Preferred
share and a combination of dividends and capital gains to the Class A share."
_

imho the above is somewhat misleading. As you know, aggregate dividends from the 15 holdings are not paying as high as 5% now, so there is no "excess dividend" that can be applied to dividends on the common/class A shares.

Q: what, then, is supporting the common/class A dividends? 
A: proceeds from selling call options plus, in recent years, excess capital appreciation in the shares of the 15 underlying stocks, have boosted the common dividends.

in a falling market, though, the above 2 beneficial actions (ie options plus capital gains) cease. The former cease slowly, as premiums & volatility fizzle out of collapsing markets. The latter cease instantly.

dividend 15's manager Quadravest is utilizing a standard option strategy that calls for selling strikes at or one increment above market, 30 to 60 days forward. This strategy is commonly employed by so-called professionals. IMHO it is one deviation away from suicide bombing. I won't back up this view here - the explanation is long & tedious & belongs more to an advanced option discussion - but i don't approve. This strategy is exactly what drove betaPro's HEX fund to its doom.

in other words, apart from hoping that the current downturn in markets will reverse itself soon & options plus capital gains will once more start to boom, the common/class A shares of DFN do not have a business plan going forward.

here is their latest financial report, if you'd like to browse.

http://media.wix.com/ugd/78f11d_4c7cc59ad75943ff9b4dfa14ef663564.pdf

best of luck to you, Mayday. I believe it's extraordinarily challenging to find investment value anywhere these days, so it's admirable that you not only keep trying, but you are willing to test out your picks in a forum like this.


----------



## gibor365

> in other words, apart from hoping that the current downturn in markets will reverse itself soon & options plus capital gains will once more start to boom, the common/class A shares of DFN do not have a business plan going forward.


 just curious...what is your view on DFN.PR.A?


----------



## Eclectic12

Mayday said:


> However with regards to the conservation of capital in order to pay the preferred dividends, isn't this more a factor upon termination of the fund at the end of 2019?


If the prospectus says dividends stop at a certain NAV or $$$ for the common shares, they stop. The termination or extension in a future year does not change this.

If forget which of this type of structure that the preferred shares kept paying the dividend but the capital share, in addition to dropping in trading price - paid no dividends for something like six months in 2008/2009.




Mayday said:


> Should one have a positive outlook on the holdings within the fund over the next three years would it not be fair
> to say it's trading at a discount?


In order to find out, one needs to be clear on the terms the split share corp is being run under and keep the "windup / extension" dates in mind. I believe this is a split corp ... where the dividends paid to the common shares are obscuring that the point of common shares is capital appreciation through leverage. 

https://en.wikipedia.org/wiki/Split_share_corporation


To figure out if there's a discount, one has to review both the timing and the prospectus terms for that investment. As the underlying stocks drop, one can't just look at what the basket is worth as that is being split between the common and preferred shares.

[As an aside, I seem to recall one insurance split corp where 1 preferred plus 7 common shares would result in one unit of the fund. The ratio may also come into play.]

I can recall reviewing the terms then valuing one common split share for TransCanada Pipes. At the time, the common valued out to $0 but as there was around three years before a potential wind up, the capital shares traded for $1 based on hope. I bought for $1 with a small amount and two years later sold for $7. The regular common stock (with no time limit or split share structure) would have been a $10 to $22 gain, in the same time frame.


If I get a chance, I might read the prospectus but keep the structure and time frame in mind. If the Canadian Market stays low where a future vote decides to wind this up ... depending on the terms - the split may mean $0 come back to the investor as the preferred shares usually have priority for splitting the proceeds.


Cheers


*PS*

I prefer the terminology from the old days. The leveraged shared getting the bulk of capital appreciation were called "capital" where this thread is calling them common shares. I worry that those who have not investigated the split share structure will confuse run of the mill, common shares with this specialised, time limited product.


----------



## gibor365

got answer from Quadravest


> There is no threshold in the prospectus or AIF where a dividend would be missed for DFN.PR.A or DF.PR.A as they receive fixed, cumulative monthly payments. Class A share payments are a target and non-cumulative.


----------



## humble_pie

Eclectic12 said:


> *PS*
> 
> I prefer the terminology from the old days. The leveraged shared getting the bulk of capital appreciation were called "capital" where this thread is calling them common shares. I worry that those who have not investigated the split share structure will confuse run of the mill, common shares with this specialised, time limited product.



this is a good point. The regular DFN shares - call them class A or call them common - do differ from traditional bank split capital shares, though, in that they are goosed up with heavy call option trading.

in addition there's a problem with the symbology. The preferreds are DFN.PR.A while the capital beneficiary shares are DFN although their correct name is DFN Class A. Because of this appearance of the letter *A* for both classes of shares, i imagine that many new investors might have trouble distinguishing them, if the common symbol were to be DFN.A. Perhaps that is why use of the adjective "common" arose when referring to the class A shares.


----------



## Eclectic12

The Financial Post article that introduced me to them in the late 90's profiled the TransCanada split corp. Banks seemed to be one part of the larger split corp universe as I can at minimum recall the "Scotia Managed Companies" group have two flavours of utility split corps and I'll have to check who put out the Lifeco split (about six or more Canadian Life Insurers).

AFAICT, it seems all split corps that I'm finding that are active on the TSX have gone over to this new system of potentially paying dividends to both types of shares.


All of this may be intentional to attract less experienced investor who are looking for income where the capital appreciation (i.e. the main reason for the capital/common shares) is at best obscured or not noticed.


Where is the DFN.PR.A coming from?
Yahoo finance is listing DFN-PA.TO for the preferred shares where DFN.TO is the capital/common. 
Google is similar, listing DFN-A (TSX) for the preferred and DFN (TSX) .... actually, this is the search. Once selected, Google is switching to "TSEFN-A".


Cheers


----------



## thepitchedlink

Wow, below 8$......i'm tempted to add a bit


----------



## james4beach

Looks like this split share nonsense is finally bursting. This bubble has popped. Both DFN and DGS shares are plummeting now. Given how complex and exotic these instruments are, it's not a big surprise.

I _really_ wish (for your own sakes -- not mine) you guys would give up on this compulsion to "generate cash" from weird kinds of shares. This is the kind of thing it leads to.

Instead, invest in standard shares or even benchmark indices. And sell shares once in a while to generate cash. You will achieve better total returns than chasing exotic instruments like these ones, that inevitably blow up.


----------



## jacofan

From Nov 2008 to March 2009 the SP went over $10 to under $5 but it appeared to continue to pay it's dividend. Sort of a weird one to understand for sure... but seemed solid with the dividend. For those that buy at the right times theres plenty of opportunity to make capital appreciation as well as dividend income at the same time. It's partner DF stopped it's dividend for a few months back in 2009 though.

Maybe this is the same opportunity as back in March 2009? You mention that these 'inevitably blow up' but maybe the opportunity with these is buying in after they have blown up? DFN has paid it dividends without missing a month for over 10 years!


----------



## humble_pie

it's the common shares (the class A shares) that are at risk. These have subsisted on options trading plus the colossal rise in value of the 15 underlying shares in the portfolio from 2009 through 2014.

gone with the wind, now.

the preferred shares ought to be OK, i'm not sure whether it's contagion that has afflicted them or whether there's something subtle that's screwed up in the protective financing that's always gone on, in order to protect the preferred dividend. Keep in mind that the preferred dividend is somewhat north of what aggregate dividends in the 15 underlyings are actually paying, the drop in the preferred price that we're seeing may be reflecting a downward adjustment for this reason.

(aside to jaco & pitched) don't you guys read complete threads? the risky option trading that's been boosting the common shares all these years has been discussed over & over & over again ...


----------



## Eclectic12

jacofan said:


> ... For those that buy at the right times theres plenty of opportunity to make capital appreciation as well as dividend income at the same time. It's partner DF stopped it's dividend for a few months back in 2009 though.


As I was looking for the leveraged capital appreciation ... I bought DF around Feb 2009. The dividend was not a consideration ... just a bonus.

This may or may not be an opportunity *but* one has to keep in mind that the point is the leveraged capital appreciation, not the dividends. Then too, as I have said previously ... if the vote date comes up where those with the votes decide to wind the corporation up, what the future prospects are won't matter. 


The preferred have a built in protection. The challenge is that if the market as a whole drops, there is nothing preventing a drop to the point that the preferred are also affected (I haven't run the numbers so I am not up on how much of a drop would be needed or how likely this is).


Bottom line is that these are not the same are regular shares so there is more involved in figuring out what they are worth and whether it is worth the risk that a recovery happens.


As with everything else ... Caveat emptor.


Cheers


*PS*

I limited my risk by allocating a percentage of the overall funds that I was buying with.

As for "one kept paying dividends that is hard to figure while one stopped", I believe DF was the older of the two so that the set points for when to pay or not were different. I know DF traded as low as two dollars a share. The dividend was suspended from Dec 2008 to May 2009.


----------



## thepitchedlink

So, people that own this.....whats your plan and thinking? Are ya worried it's going to fold up? sell and run? pick up a bit more and wait for this silliness to subside.....


----------



## jamesbe

Look back to 2008 when it did the same. Just wait it out


----------



## gibor365

> I believe DF was the older of the two


 No, DFN is much older  
From Quadravest email "


> The main difference between the two would be that DFN.PR.A (P3) was launched in 2004, whereas DF.PR.A (P3 low) was launched in 2006. Because DFN.PR.A was launched earlier, it has a higher net asset value per unit and therefore more asset coverage and downside protection


----------



## gibor365

thepitchedlink said:


> So, people that own this.....whats your plan and thinking? Are ya worried it's going to fold up? sell and run? pick up a bit more and wait for this silliness to subside.....


I added more DFN.PR.A


----------



## thepitchedlink

jamesbe said:


> Look back to 2008 when it did the same. Just wait it out


Yup


----------



## james4beach

Just wait it out... classic.



jacofan said:


> Maybe this is the same opportunity as back in March 2009? You mention that these 'inevitably blow up' but maybe the opportunity with these is buying in after they have blown up? DFN has paid it dividends without missing a month for over 10 years!


But there must be risk somewhere in there. There has to be. What you must do is study the financial structure (good luck by the way) until you discover where the risk lies, exactly. If you can figure out and draw a box around where the risk lies, then you can at least make a decision by considering risk vs reward.

When you can't quantify the risk, you're not making an informed decision about risk vs reward. Investment is all about risk/reward balance.

The reason I know there is risk hidden in there somewhere is because, if you really could perpetually get 12% yield with no risk, then every bank in the world would abandon traditional lending and speculation and instead they would all buy the split share corps you hold... for perpetual 12% returns. Beating the pants off everything else they do to earn income.

Also, every corporation on earth would abandon their normal profit engines, close down the factory, lay off everyone, and all go buy DFN & friends and everyone would sit back in la-z-boys and enjoy the perpetual riskless income. General Electric would turn off the lights, put the factories on sale, and the owners would buy DFN shares.

Do you see what I'm getting at? I think you're taking on risk without understanding what the risk is. I've been studying financial instruments for 14 years and after you dig a while, you always find the crux of the scheme that suddenly explains why it seemed too good to be true.

Yes I know I'm a bit cynical but here in this thread we have 9 pages of comments from people trying to figure out what the downside is, and nobody has figured it out yet. Which means that whatever the nature of this risk, it's damned difficult to discover and put a box around it. Yet, we know the risk exists, because there is no such thing as zero-effort passive high returns of this magnitude.


----------



## humble_pie

james4beach said:


> But there must be risk somewhere in there. There has to be ...
> 
> ... here in this thread we have 9 pages of comments from people trying to figure out what the downside is, and nobody has figured it out yet. Which means that whatever the nature of this risk, it's damned difficult to discover and put a box around it.



actually there have been at least two (2) parties who have consistently pinpointed exactly what the risks are for DFN common & that was going back several years ago. Also ever since. 

it's absolutely fine if you don't want to read their posts but imho it's not fine to speechify so fiercely about vague oceanic *risk* that you don't seem to understand ...


----------



## Eclectic12

james4beach said:


> Looks like this split share nonsense is finally bursting. This bubble has popped. Both DFN and DGS shares are plummeting now. Given how complex and exotic these instruments are, it's not a big surprise.


Hmmm ... without tracking the basket of stocks and considering these are supposed to be leveraged *by the defined structure*, how do we know it is a bubble versus the tracking the way it was built?

Isn't leverage supposed to work in one's favour on the up and work against one *more than owning the similar unleveraged investment*? What's showing you that the drop is beyond the structure specs?




james4beach said:


> ... Instead, invest in standard shares or even benchmark indices. And sell shares once in a while to generate cash. You will achieve better total returns than chasing exotic instruments like these ones, that inevitably blow up.


In another thread, the stimulus packages were supposed to have pumped all equities up so shouldn't the advice be to avoid both bubbles?




james4beach said:


> ... The reason I know there is risk hidden in there somewhere is because, if you really could perpetually get 12% yield with no risk, then every bank in the world would abandon traditional lending and speculation and instead they would all buy the split share corps you hold... for perpetual 12% returns. Beating the pants off everything else they do to earn income.


You haven't noticed that Scotia Bank has around six split corps, TD used to have three (I haven't looked lately)?

The banks are clearly marketing these products, never mind that the theme of the FP article I read around 2000 stated that institutional investors were using the split share setup to their advantage so the retail investor should be aware of and where it made sense, use it to their advantage for a small portion of the overall portfolio.

You may not like the structure and may be correct that a lot of people don't understand or aren't using them properly but from what I've read, the retail investor can stop buying completely where the split share structure will still exist. 




james4beach said:


> ... Also, every corporation on earth would abandon their normal profit engines, close down the factory, lay off everyone, and all go buy DFN & friends and everyone would sit back in la-z-boys and enjoy the perpetual riskless income. General Electric would turn off the lights, put the factories on sale, and the owners would buy DFN shares.
> 
> Do you see what I'm getting at?


It seems like an overly simplistic argument.

CEO of CWB ...


> We are talking losses on our loans so let's shutdown, buy DFN where the underlying assets are mostly in the same business we failed at.


CFO of CWB ..


> Great idea ... let's call a press conference.



Once all the banks jump on the band wagon, won't the sector disappear?
Or maybe the fact the income comes from business / business growth might be important?


A bank MF or pension fund on the other hand, playing with a small percentage of overall assets to tie up fewer assets to earn a larger dividend income on the other hand, makes sense. Add in that likely their numbers (never mind scale or trading infrastructure) will give them better entry/exit points.




james4beach said:


> I think you're taking on risk without understanding what the risk is.


Entirely possible ... but then again, because someone has misunderstood dividend yield so that they thought that owning the stock for a few weeks entitled them to a full year of dividends - would you complain about the investor or the structure?




james4beach said:


> Yes I know I'm a bit cynical but here in this thread we have 9 pages of comments from people trying to figure out what the downside is, and nobody has figured it out yet.


I'll have to review the thread but I'm sure I commented that for a typical split share structure, for the capital appreciation class of share - the worst case is having the dividend suspended then a windup that pays the investor $0. I seem to recall quoting the example from the early 2000's where on paper, the TransCanada capital appreciation share was worth $0 but traded for $1 on the basis of management actions and having another four years before a wind up vote.

I don't recall if I commented that the dividend appreciation class, worst case would be dividends paid dwindle until wind up where the proceeds split means the payout is something less than one paid. With the types of stocks in the basket, if all of them were worthless ... I suspect the investor will not care as with CPP, pensions and so many others investing in those stocks - it would have to be a massive collapse to get to this many key stocks being worthless.


Cheers


----------



## agent99

A lot of discussion here about a split. I own just the preferred side of DGS.PR.A and both sides of Premium Income Fund (PIC.PR.A and PIC.A) If you want a juicy yield, PIC.A currently yields about 18%! Given that the split fund owns just the 6 large Canadian banks, you might ask how yield can be so high.

PIC is made up of preferred shares and capital shares. These were valued at the last renewal of the fund at about $15.60 and $8.90 respectively. The fund will pay preferred shareholders 5.75% pa based on the $15.60 issue price. (More at current price) Capital share holders will be paid a distribution which currently is set at $0.20 per quarter or 80c pa. 

I don't recall actual dividend income that banks would have contributed, but it would likely have covered the 5.75% distribution for the preferred side, plus operating costs plus just a part of the capital share distribution. The fund would no doubt have tried to do some options trading to boost income, but that would likely not be substantial. 

So what happens in a flat or down market, is that the capital distributions are largely ROC. In other words, your own money. The shares now trade at about 1/2 the issue price for that reason while the banks themselves are not down nearly as much.

Now, if we could foresee future strength in bank prices, at $4.00 the capital shares could be attractive because the could bounce back up. same might be true of buying DFN. But you would have to have 20/20 foresight and predict a bull market!

In thinking about this, I just put in a sell for the 2000 PIC.A units we still have. Need the money anyway! Interestingly, that is about my ACB!

DFN holds a different basket of shares, but as a split, would likely react in about same way.


----------



## humble_pie

agent99 said:


> DFN holds a different basket of shares, but as a split, would likely react in about same way.



so sorry but i disagree. It's the heavy options trading in DFN - with unfortunately narrow trading paramaters - that has mostly supported the common dividend since inception. This fund is a hybrid split with a big option strategy that might now be going in the wrong direction.

the other booster of DFN common share dividends was - as andrewf pointed out - the fact that the recent 6 year bull market created big capital gains in the 15 senior stocks which this fund is allowed to own. When concretized - via option assignments - these gains had to be paid out, so into the dividend they went. Alas poor Yorick, such gains may also now be history.


----------



## Eclectic12

Then too, likely there's a range of prices the basket has been bought at plus any sales so today's yield doesn't seem to mean much to me without some sort of historical breakdown, including sales.

As for "hybrid split" ... when I was looking for financial split corps in late 2008/early 2009, none found were the old style split corp that paid nothing in dividends. It certainly makes it a lot harder to evaluate but apparently is the "new normal" for split corps.


Cheers


----------



## agent99

humble_pie said:


> so sorry but i disagree. It's the heavy options trading in DFN - with unfortunately narrow trading paramaters - that has mostly supported the common dividend since inception. This fund is a hybrid split with a big option strategy that might now be going in the wrong direction.
> 
> the other booster of DFN common share dividends was - as andrewf pointed out - the fact that the recent 6 year bull market created big capital gains in the 15 senior stocks which this fund is allowed to own. When concretized - via option assignments - these gains had to be paid out, so into the dividend they went. Alas poor Yorick, such gains may also now be history.


Well, PIC being invested in the 6 big banks also benefited from the bull market. PIC.A got down to about $2.00 in 08/9 but recovered to close to $9.00 in 2014.
It also carries out options trading:
* Option Strategy*
The Fund employs Strathbridge’s proprietary SSO option strategy to generate additional returns above the distributions earned on its equity securities. In addition, the Fund may write cash covered put options and may invest up to 10% of net assets to purchase call options, both in respect of securities in which the Fund is permitted to invest.

Click here for a detailed review of the Strathbridge Selective Overwriting (“SSO”) strategy.


----------



## humble_pie

but what have strathbriddge or PIC got to do with the price of chicken?

this thread is about how quadravest managed to push up yield on common DFN shares to north of 10%. It's not about any other split financial pair.

imho it's a bit useless to compare the DFN class A - aka common - & preferred shares to standard bank split shares because the DFN combo is such a heavy option trader.

so folks who don't understand options & who won't bother to read the DFN prospectuses are never going to understand how or why DFN has been paying so high on its common shares these past few years.

the big boosters in DFN have been 1) their severely defined option strategy, a strategy that happened to conflate with the market direction in recent years; plus 2) repeated capital gains triggered by the inevitable option assignments, which gains in turn had to be paid out to common shareholders via the dividends.

the bad news is that too many assignments mean instant gains but trouble further down the road. This is the decay at the heart, the snake in Eden, of every hyper-aggressive option writing strategy, when the mandated universe of underlying stocks is limited to the same 15 candidates, or 30 candidates as in the case of horizons's HEX, etc.

the DFN prospectuses over the years have always spelled out that new shares issued in secondary offerings are 100% intended to support the DFN preferred share dividends. The current financings are said to be adequate to 2019. For the preferred shares, not for the common shares.

other than gains directly from option trading & from option-exercise-triggered capital gains in the 15 underlying shares, there is nothing to support dividends for the DFN common shares.

frankly sometimes i wish that folks without options knowledge would stop making up fantasies & fairy tales about the DFNs.

PS do you really believe that the strathbridge SSO statement is *a detailed review* of their option strategies? me i'm a fairly good option trader, i'm sorry to say this, but to my eyes, the strathbridge text is only a bunch of pompous abstract gobbledygook.


----------



## agent99

humble_pie said:


> but what have strathbriddge or PIC got to do with the price of chicken?
> 
> this thread is about how quadravest managed to push up yield on common DFN shares to north of 10%. It's not about any other split financial pair.
> 
> imho it's a bit useless to compare the DFN class A - aka common - & preferred shares to standard bank split shares because the DFN combo is such a heavy option trader.


I suppose I could have started a thread titled : *How is it possible for PIC to earn 18%+ yield?* Perhaps you could then take the time to read their prospectus and methodology and let us know.

BTW, Not sure what a "_standard bank split_" is. 

I am obvious out of my depth seeing you are such a knowledgeable options trader, so I will butt out of this thread.


----------



## james4beach

humble_pie, I've read this thread but I suppose I still don't have a clear grasp of the risk of these shares. For some reason I'm not getting a clear picture of what's going on.

One risk seems to be options writing strategies and that their strategy could go south.

Another risk is that if underlying cut their dividends, there can be huge declines.

Or that the underlying companies collapse.


Am I on the right track?


----------



## humble_pie

james4beach said:


> One risk seems to be options writing strategies and that their strategy could go south ... Am I on the right track?



yes, your first-mentioned risk is the one.

often, option traders keep on selling options that are too close to the money & also with expiration dates that are too close in time. In calls, they would be continuously writing/selling calls that are only one increment OTM & only 30 or 60 days out in time.

this is fine, if the underlying stock doesn't move much.

but in a strong & sustained 6-year bull market like the one we've recently known, the underlying stocks can easily rise above the strike price. Often, in that case, the option manager who has sold short calls will allow the options to be assigned, thus the stocks will be called away.

the problem is that the proceeds received from this disposition are less than it will cost to replace the stock. For example, suppose trade manager buys stock at 68.54, sells a 70 call 6 weeks out at .82. By expiration, stock has risen to 71.16. Because his fund mandate forces him to own only a small & already-identified universe of stocks, trader has no choice but to re-buy the same stock he has just let go at 70, except that now he must pay 71.16, so he ends up with fewer shares.

(one might argue that he has 70.82 in proceeds that he can utilize to buy the replacement shares, but the fact is that those 82 pennies from the original call option sale have already gone to fund the dividend.)

all this means that he has fewer options to sell in the new cycle.

multiply this by most of the stocks in the trade manager's portfolio, several times a year, across a sustained bull market lasting several years & you can see how, when the market finally peaks, his portfolio structure has become fairly rickety.

once the share prices themselves start dropping, the trade manager's risk of assignment disappears. He can even continue to generate income by writing more calls as the share price drops. So it's possible for this kind of option fund to keep on paying some sort of dividend. 

but now the trouble scoots to the other shoe, which is also falling very hard. The NAV of the fund is dropping with falling market prices. The option manager has rolled his cost base so high, with all that frequent exercising & replacing of shares, that he doesn't really like to sell calls with strike prices below his cost. Premium is also fizzing out of option prices so there are fewer $$ coming in from option sales. Meanwhile the fickle shareholders are probably jumping ship & bolting.

james4 if you look at some of the individual option traders here, you will quite often see the same thing on a retail scale. A lot of folks are drawn to repeatedly selling close-to-the-money, close-to-expiration options, at least at first. It's the volatility, they say. Gotta grab that volatility before it vanishes in a matter of days.

there are better strategies, though. Better in the sense that they are less likely to blow up in one's face. More on those another day, ok.


----------



## agent99

james4beach said:


> humble_pie, I've read this thread but I suppose I still don't have a clear grasp of the risk of these shares. For some reason I'm not getting a clear picture of what's going on.
> 
> One risk seems to be options writing strategies and that their strategy could go south.
> 
> Another risk is that if underlying cut their dividends, there can be huge declines.
> 
> Or that the underlying companies collapse.
> 
> 
> Am I on the right track?


Aside from options trading which depends on how much of that they do at any time, and how good they are at it, the capital shares are really a leveraged growth play on the underlying stocks. When issued there are an equal number of preferred and capital shares. Prefereds shares were valued at, for example, $15.00 and Capital shares at $10.00. Total $25.00. If prices of underlying stocks increase, total NAV of split will increase. say it goes from $25 to $30, someone owning the capital stock would have a 50% gain on their $10.00 capital shares. But if markets drop as they are now, and total nav drops to $20, then capital share holder would see a 50% loss. 

My experience is with PIC which has a similar structure to DFN and also does options trading (although perhaps less). In late 2008, Total NAV dropped to something like $17.50 and $10.00 capital share price dropped to about $2.30. In other words, a 75% drop for the capital side of a split that owns our 6 major banks! It is this leverage that is the major risk. Explained further here. Buyers should also look to see if they are paying Premium to NAV. In the case of PIC.A it is trading at close to NAV (about $4.40). I don't hold DFN, but it looks like it may be trading at a premium to NAV?

I did well with PIC.A at one time in an up market. My sell order for the little I still have has not filled yet. I am happy to keep the preferred shares.

Rob Carrick wrote a good article on DFN:

http://www.theglobeandmail.com/glob...nt-yield-comes-with-questions/article1462085/

One other thing. These companies assign a distribution to the capital shares. In cases this is overly optimistic but once established, it is hard for them to cut it without causing a drastic decline in the capital share price. So they maintain the distribution one way or another. And good part of the distribution becomes ROC - in other you get your own money back. This also causes share value and price to decline.

Bottom line - Split preferreds are OK, but capital shares not, except in a bull market. What concerns me even about the preferreds, is that the companies managing these splits could fail if there was a rush to retract shares (most splits allow shareholders to retract shares at certain time, rather than sell them on the open market)


----------



## Eclectic12

james4beach said:


> humble_pie, I've read this thread but I suppose I still don't have a clear grasp of the risk of these shares. For some reason I'm not getting a clear picture of what's going on ...
> 
> Am I on the right track?


I don't understand ... OOH, you are listing the risks from the details quite well.

OTOH, you seem to be completely missing the leverage built into the split share structure.


> The capital units are for risk-takers only.
> 
> In exchange for giving up most or all of the underlying dividends, these units are entitled to all of the value in the underlying portfolio over and above what the preferreds are entitled to. *The capital shares are essentially a leveraged play on the underlying portfolio - and as we all know, leverage cuts both ways.*


http://www.theglobeandmail.com/glob...-and-downs-of-doing-the-splits/article622696/


So where people have misunderstood the basic structure so that cutting the dividend results in a loss of popularity, not only will there be a decline - it will be magnified, same as the growth is magnified.

I believe I've mentioned before that the TransCanada split capital share that was worthless, traded for $1 with something like four years to the next wind up vote. Over the next two years, the common stock doubled but the capital share went from $1 to $7. When compared to the common stock, less capital was needed by the investor to achieve a magnified gain.

If this is truly a split share structure ... the capital shares should by definition, have leverage built in, adding to your list of risks.


Another risk is that where one believes the common stock will recover, this had a built in termination date, as per the high level details of the two share classes.



> Class A Shares:
> (i) to provide holders of the Class A Shares with regular monthly cash dividends initially targeted to be $0.10 per Class A Share to yield 8.0% per annum on the original issue price; and
> (ii) *on or about December 1, 2019 (termination date)*, to pay the holders of Class A Shares at least the original issue price of those shares.


http://www.quadravest.com/#!dfn-fund-features/c1rr2


I think you need to add time horizon as another risk as a time limitation does not exist for common stock, AFAICT.


As I say, worst case is one ends up losing the dividend income and then 100% of the investment ... which in the current downward market, may be a possibility where there is officially only three years for the underlying portfolio to change value. If it does roll close to the termination date, a lot will depend on management as well as shareholder voting as most that I have tracked over the termination period have voted either a renewal or wind up where the shareholders received shares in the new capital shares that have a termination date five or ten years down the road.


Now if you already have these risks in mind, that's great but it would help to indicate in your post that you are interested in specific risks instead of trying to list all the risks.


Cheers


----------



## humble_pie

i flew lightly over the strathbridge website & tried to find something nice to say about PIC.A.

ok here's nice: the strathbridgians are *not* continuously selling/writing 30-day calls one increment OTM. Their proprietary software tells them whether & when to sell. That's good.

also nice: PIC shareholders recently OK'd management's request to sell/write options on stocks other than the extremely tight little universe of only 6 chartered bank stocks, so this gives strathbridge more flexibility. That's good.

but then i looked at PIC dot A's chart since inception. OMG what a nightmare. Short of bankruptcy, it was one of the worst looking charts a body could imagine. From a high north of $22 shortly after inception, this poor creature has plunged straight down into the $3 range.

meanwhile the strathbridgians are piously declaring on their website that it's their intention to pay back to both class A & preferred shareholders the IPO prices when the funds are wound up.

PIC dot A looks so much worse than DFN, which is already horrible enough. We can even find Eclectic telling us, right here in this thread, that some split capital shares do in fact plummet all the way down to zero. Oh dear, it's all too much to bear. Proper option trading does not look like this imho. I had to depart strathbridge website on the double, eyes averted, running as fast as i could.


----------



## Eclectic12

agent99 said:


> ... When issued there are an equal number of preferred and capital shares. Prefereds shares were valued at, for example, $15.00 and Capital shares at $10.00. Total $25.00. If prices of underlying stocks increase, total NAV of split will increase. say it goes from $25 to $30, someone owning the capital stock would have a 50% gain on their $10.00 capital shares.
> 
> *But if markets drop as they are now, and total nav drops to $20, then capital share holder would see a 50% loss.*


I assume the "when issued" prices were from the prospectus ... which I was going to dig out.

As I have posted ... it is all good and well to drill into the details of the options paying, income generating bits to revise one's risk estimation.

Ignore the leverage built into the split share structure and the investor is in for a big shock.




agent99 said:


> ... These companies assign a distribution to the capital shares. In cases this is overly optimistic but once established, it is hard for them to cut it without causing a drastic decline in the capital share price.


That's where YMMV ... when I bought in Mar 2009 or so, the dividend had been cut as per the prospectus line "dividends will be suspended when trading price is under $5". I'd have to check whether it was DF or DFN.




agent99 said:


> ... Bottom line - Split preferreds are OK, but capital shares not, except in a bull market.


Won't it depend on when on buys and whether one tops up in the bear market?

Initiating a position in Mar 2009, having the dividends resume in about five months later then collecting around 40% of the purchase price before selling around a 200% gain didn't seem like a bad move during the bear market of the time.

Of course, of the overall money moved into the market ... this was a percentage.

Cheers


----------



## james4beach

Thanks for pointing out the leverage issue!


----------



## Eclectic12

No offense ... but post #2 says:


> The capital shares are a kind of leverage of the overall portfolio ...


and your post # 4 says:


> It explains why the Class A (capital shares) exhibit a leveraged effect;



Is it any wonder I am confused as to why the leverage was talked about then disappeared when discussing risks?


Cheers

*PS*

I guess with pages and pages being written, there's lots of distractions for the details du jour. :biggrin:


----------



## agent99

humble_pie said:


> but then i looked at PIC dot A's chart since inception. OMG what a nightmare. Short of bankruptcy, it was one of the worst looking charts a body could imagine. From a high north of $22 shortly after inception, this poor creature has plunged straight down into the $3 range.


PIC.A was issued at $10.00 originally and shortly later because of fees etc, dropped to $9.xx. NAV. I don't recall it ever reaching much over $12.00, never mind $22.00. It's price follows it's NAV and quite closely. Perhaps you are looking at the Total NAV, which includes the preferreds that have a NAV of about $15.00 (which would put PIC.A at $7.00) The banks stocks would have to have had a VERY large jump in price for PIC.A to have reached $22!

The PIC fund could be redeemed by Strathbridge at certain intervals. Next redemption date is Nov 1 2017, but it can be automatically extended for another 7 years. Because there must be an equal number of preferred and capital shares, NAV of PIC.A can change at renewal date and in fact did at last renewal. This makes it hard to look at historical data. 

On some other threads here, some are very bullish about banks stocks at their current prices. If anyone is very certain about a recovery in bank stock prices, they could buy PIC.A at about $4.00, collect a healthy distribution (albeit largely ROC!) while they wait and then get a 100% CG if banks recover by 20%. (my math might be wrong, but something like that). Personally, I have no confidence banks will recover any time soon, so do NOT recommend this!


----------



## Eclectic12

agent99 said:


> ... BTW, Not sure what a "_standard bank split_" is.


Based on what I learned in the late '90s ... bank or otherwise, it meant the preferred were static in price plus received all the dividends (minus the split share corp's cut). The capital shares received no dividends but received all of the capital gains (minus the split share corp's cut) over and above the baseline.

When I started looking for split shares in late 2008, I was startled that the "capital share, no dividends" could not be found but these new "capital share plus dividends" versions could.


From my perspective, unless the split share universe had changed since then, I'd argue that the "_standard <insert area of choice> split_" does not exist any longer. Maybe it's product of the prolonged bull market?


Either way ... understood where it is used wisely or misunderstood with mixed results - they have been around a long time and likely will be around a lot longer.
As long as one understands it, it is a tool in the toolbox.


Cheers


----------



## humble_pie

agent99 said:


> On some other threads here, some are very bullish about banks stocks at their current prices. If anyone is very certain about a recovery in bank stock prices, they could buy PIC.A at about $4.00, collect a healthy distribution (albeit largely ROC!) while they wait and then get a 100% CG if banks recover by 20%. (my math might be wrong, but something like that).



on my knees, i do beg of any bank super-bulls not to buy PIC dot A. Not now, not ever.

agent99, are u a betting man? i say the strathbridgians look to be running this thing into its grave. Are we on?

an intelligent, enlightened, reasonable & prudent super-bull who fancies options could quietly go buy a LEAPS 2018 call option in XFN. Or even XIU. He won't get any pesky return-of-capital so he won't have to keep fiddliing with his cost base in the spreadsheet.

instead, if he's called his call correctly & the banks manage to survive their CoCos, he'll have a beautiful big blooming capital gain in 2018.


----------



## agent99

humble_pie said:


> on my knees,


For getting that $22 figure wrong? 



> i say the strathbridgians look to be running this thing into its grave. Are we on?


You chose to leave out my final sentence in the paragraph you quoted. Why? 



> Personally, I have no confidence banks will recover any time soon, so do NOT recommend this!


For me, this thread is dead.


----------



## humble_pie

agent99 said:


> For getting that $22 figure wrong?




why would i be wrong, though. The venerable Toronto Stock Exchange itself says the high for PIN.A was $23.37 on 29 october 1997.

here's the chart ...


----------



## humble_pie

agent99 said:


> You chose to leave out my final sentence in the paragraph you quoted. Why?



you were saying that parties who believe banks will thrive could buy PIC dot A & if they are correct in their forecast, they will obtain an excellent gain, no? you went on to say that you would not be taking this action & you do not recommend the choice.

my suggestion was also for parties who believe that banks will thrive. However, instead of buying PIC dot A with its dropping-towards-suicide historical chart profile - chart is above - i suggested that bank bulls would have a better chance with 2018 LEAPs options in XFN or XIU.

leverage would come into pay with the exchange traded LEAP call, but the cost would be far less. Bank bulls holding LEAPs calls would also benefit from the absence of messy returns of capital in non-registered accounts.


----------



## james4beach

humble_pie, I tend to agree ... if someone is a bank bull, they can buy a LEAPS call on say XFN or XIU as the case may be.

Or maybe plain old fashioned long XFN using broker margin?

P.S. I would personally not do any of the above and I think they're all bad ideas, but that's because I am bearish on the banks.


----------



## Eclectic12

james4beach said:


> humble_pie, I tend to agree ... if someone is a bank bull, they can buy a LEAPS call on say XFN or XIU as the case may be.
> 
> Or maybe plain old fashioned long XFN using broker margin?


All alternatives that one can argue the pro or cons off.

For someone who does not have their account setup for options (I had to apply) and/or wants leverage without having to think about margin calls, it is another choice.




james4beach said:


> P.S. I would personally not do any of the above and I think they're all bad ideas, but that's because I am bearish on the banks.


The part I am puzzled by is why instead of arguing for a different method, the more recent comments are ignoring what was known before and/or taking a "my way or the highway" attitude despite knowing there are a range of investing skill levels here.

IMO ... this is drastically reducing value of this forum.


Cheers


----------



## humble_pie

Eclectic12 said:


> The part I am puzzled by is why instead of arguing for a different method, the more recent comments are ignoring what was known before and/or taking a "my way or the highway" attitude despite knowing there are a range of investing skill levels here.
> 
> IMO ... this is drastically reducing value of this forum



sorry, disagree, i have no idea what you are talking about.

this thread commenced & continued for a while as a helpful thread about whether it is or is not a good idea to buy DFN class A shares, aka DFN common.

there are actually several threads dating back years about the DFNs & all of those other threads conclude that the preferred is OK but the common is dodgy ... i'd like to mention, if i may, that i've usually been the party who has tried to shed light on what the DFN managers are doing/not doing with their option trading ...

alas someone hijacked this particular thread & turned it into an argument about a different security named PIC dot A ...


----------



## jargey3000

know what?... I've lost a ton of $ investing in things I THOUGHT I knew a little about.... banks, oil companies & the like...
I don't hardly understand ANY of the discussion about this DFN thingy... maybe I should pull a "George Costanza" here....do the complete opposite...I think I'm gonna put EVERYTHING into DFN....close my eyes & hope for the besT!


----------



## Eclectic12

humble_pie said:


> sorry, disagree, i have no idea what you are talking about.
> i'd like to mention, if i may, that i've usually been the party who has tried to shed light on what the DFN managers are doing/not doing with their option trading ...


That's all great stuff ... up until posts start talking about valuations and/or assessing risk. 

It is weird to me that such broad topics seem to have happily skipped over the crucial role of the NAV, as outlined in the prospectus.


> All Preferred Shares and Class A Shares outstanding on the Termination Date will be redeemed by the
> Company on such date... Except in the case of an early termination following a Liquidation Event (as defined herein),
> the Company will, after receipt of the net cash proceeds of the liquidation of the Portfolio, as soon as
> practicable after the Termination Date: ... (c) thereafter distribute to holders of the Class A Shares the remaining assets of the
> Company, if any, as soon as practicable after the Termination Date.


Now was that from the DFN prospectus or the PIC prospectus? 
They are so similar, I'd hate to have quoted from the wrong one to potentially hijack the thread ... 

Just checked ... it is the DFN prospectus. :biggrin:


I would also expect discussions of valuation / risk to consider when the Class A shares suspend the dividends but little to nothing comes to mind in the thread. 


> No regular monthly dividends will be paid on the Class A Shares in any month as long as any dividends on the Preferred Shares are then in arrears or so long as the Net Asset Value per Unit is equal to or less than $15.00.


It is a long thread so maybe I missed something in the past.
So yes, with a dropping portfolio value ... the options can dry up but then again, there is also a threshold that suspends the Class A dividends, dropping them off the expense sheet.




humble_pie said:


> ... all of those other threads conclude that the preferred is OK but the common is dodgy ...


The G&M article concludes the same thing.

The trouble is that there is nothing magical about the preferred's ... they are a part of the over all portfolio where each preferred has a matching common. If the market as a whole were to decide to shun the common then I suspect the split corp would wind up.

As I mentioned earlier up thread, these were plenty of split corps around when discount brokers were the new kid on the block so I suspect that regardless of what the little guy does, the structure will continue to exist.


Cheers


----------



## LongShorts

Since I'm heavy into income investing, this one looks really attractive to me. Dividend yield sitting at 11.7% right now, it's hard to look past that. I've read through a lot of this thread and frankly, being a novice investor a lot of this confuses me. So, I'm doing what I always do and just research the hell out of the stock. Since I hold all of my positions in our TFSAs, the tax implications don't really affect me on the dividend payout. My concern with this equity right now is that it has been underperforming the TSX for a solid 52 weeks now, but, that being said it's a relatively low volatility stock. The dividend payout has also been sustained for a lot of years now, which really helps pad my monthly income compounding.

I will be entering a small position (3% of portfolio) in this one and watch it closely for now.


----------



## humble_pie

LongShorts said:


> ... I'm doing what I always do and just research the hell out of the stock



shorts if you truly do RTHOOTS, how come you're buying the common shares here? thinggabbouddit


----------



## LongShorts

humble_pie said:


> shorts if you truly do RTHOOTS, how come you're buying the common shares here? thinggabbouddit


Perhaps it's my newness shining through, but I like the yield on the class A shares much more. I understand that the position of a preferred share is much stronger, but the monthly payout history on the DFN stock has been $0.10/share since inception, while preferred has only been $0.04375. I know that "common shares are never a guaranteed payout", but 12 years of paying through any financial climate seems to be a pretty safe position to me. Please let me know if I'm being a dumb rookie


----------



## humble_pie

^^

i think if you can manage to keep it 3% of portf or less, things might be ok .each:

they can stiff the dividend by issuing new shares, which they've done in the past. I take it volatility in the price of the class A common does not bother you?

then there's also the costanza approach. If costanza fails, there are always dart boards.
.



jargey3000 said:


> know what?... I've lost a ton of $ investing in things I THOUGHT I knew a little about.... banks, oil companies & the like...
> I don't hardly understand ANY of the discussion about this DFN thingy... maybe I should pull a "George Costanza" here....do the complete opposite...I think I'm gonna put EVERYTHING into DFN....close my eyes & hope for the besT!


----------



## LongShorts

Aside from the dip in January, it seems to be a relatively low volatility stock for my equity portfolio. I plan on going long with almost all of my positions, and it hasn't moved more than 20% one way or the other over the last 5 years. with a projected 11.7% annual yield I can say the risk/reward ratio seems pretty promising on a long position. I have 25% of my portfolio in much safer places (bonds, low MER mutual funds, laddered GICS). I'm trying to build an annualized 8% dividend return. I have some safe blue chip stocks paying 3-5% each, so I do have to take some riskier plays in order to bring my dividend up. Hey...it's all a learning experience.

On a side note, I believe my trading strategy is more akin to Kramer....


----------



## humble_pie

i like Kramer. Much funnier than Kevin. Smarter, too.


----------



## gibor365

> Aside from the dip in January


 AFAIR, this is when they issued new shares ... than was time to buy 
At least you need to track their NAV that is published on issuer website every months....if it goes below $15 , dividends will be suspended. This is why DF suspended dividends 3 months ago. (Now DFN's NAV is above $17)...



> I have some safe blue chip stocks paying 3-5% each


 didn't you consider DFN.PR.A ? Dividends around 5.2%, but much safer... (for example DF.PR continue payinng dividends).


----------



## LongShorts

I did consider it, however, I'm using it as a riskier investment to bring my total dividend return up closer to my 8% per year goal. the 5.2% wouldn't help that very much. Again, at 11.7% dividend the risk/reward ratio is favourable for me.

As for the suspended dividends, forgive me for being simple, but I cannot find anything about them ever suspending their dividend. Their dividend history doesn't have any gaps in it that I can see...


----------



## gibor365

> As for the suspended dividends, forgive me for being simple, but I cannot find anything about them ever suspending their dividend. Their dividend history doesn't have any gaps in it that I can see...


If you read carefully , I was talking not about DFN, but about DF (II series of the same product). DF suspended dividends 3 month ago when it's NAV fell below $15


----------



## LongShorts

gibor said:


> If you read carefully , I was talking not about DFN, but about DF (II series of the same product). DF suspended dividends 3 month ago when it's NAV fell below $15


Sorry, thought you had just missed the N. I invested in DFN. Middle of the pack. 17% yield is a little too good to be true, even for me.


----------



## gibor365

> I'm trying to build an annualized 8% dividend return.


 just curious how you are planning to achieve 8% with 3% allocation to DFN?


----------



## andrewf

lol @ DFN being low volatility. It is basically a 2x levered portfolio of TSX divident payers.


----------



## james4beach

andrewf do you think someone might build a 3x leveraged income fetish ETF (ticker DDD), perhaps something that uses margin + DFN + XTR ?


----------



## LongShorts

gibor said:


> just curious how you are planning to achieve 8% with 3% allocation to DFN?


I have a few other high yielders...SOT.UN, DIV for example. CPG had been providing over 8% until the dividend slash...


----------



## gibor365

LongShorts said:


> I have a few other high yielders...SOT.UN, DIV for example. CPG had been providing over 8% until the dividend slash...


Do you have REIT? Many of solid REITs pay 8+% yield


----------



## LongShorts

gibor said:


> Do you have REIT? Many of solid REITs pay 8+% yield


Yes I do. I have 4 currently. Strongest holding is cominar CUF.UN. I've been disappointed with Riocan lately though......


----------



## gibor365

LongShorts said:


> Yes I do..


I still don't get how you gonna get 8% yield on portfolio...you said that your core securities give you 2-4%, So to get 8% , you need to have half portfolio yielding 13%


----------



## james4beach

I say this only because I am worried for you guys. I am concerned about how you're chasing yield.

Why not just buy XIU and sell off shares to raise cash? You'll get a superior total return and still get the cashflow you need.


----------



## LongShorts

gibor said:


> I still don't get how you gonna get 8% yield on portfolio...you said that your core securities give you 2-4%, So to get 8% , you need to have half portfolio yielding 13%


So I calculated the mean dividend value of my core blue chip stocks and they are currently sitting at a 4.7% interest (Thanks in large part to my holding with BNS which was at 5.9% yield when I purchased). They make up a total of 40% of my portfolio. The remainder is 15% in bonds/GICs and indexed mutual funds/ETFs, 20% in higher risk stocks and the remainder in cash. Currently my high risk stocks have a mean dividend value of 10.5%. When I say I want and annualized 8% return on dividends I am strictly talking about my equities. Therefore, I'm currently placing my cash in various high dividend-paying equities to try and bring my annual return up. I understand that I'm sitting just over 6% right now, so I have a lot of ground to make up. I'm trying to be very careful and pick my equities slowly, which is why I still have so much of my portfolio in cash. I'm trying to whittle my cash holding down to around 10%. Let me know if I'm out in left field...which tends to happen.

Anyways, kind of highjacked the thread. Nice little 3% bump in DFN today....


----------



## Spudd

LongShorts, I thought you were young. If so, why do you care so much about the yield on your portfolio?


----------



## LongShorts

8% yield will keep me on track for my short term financial goals (paying off remainder of mortgage). I'm building an income portfolio, but I've been careful to pick equities that have a good potential for significant capital growth as well. That being said, yes I'm somewhat young, and yes I'm very new to self-directed investing...so I might be very very wrong as well. So far I've had alright CG and one month's worth of dividend payouts which makes me feel all warm and fuzzy.


----------



## gibor365

DF after 3 months of suspension, resumed paying dividends after NAV for March increased to $14.95 . Yield now 18% + .... LongShorts do you want take a risk?!


----------



## james4beach

Thought I'd revisit this topic. On August 10, 2017, DFN fell on heavy volume. This coincided with this announcement of a new share offering: http://www.marketwatch.com/story/di...unces-overnight-offering-2017-08-09-151602418

Can someone explain what happened? Did they issue shares and dilute the existing shareholders?

Does this change the attractiveness of DFN.PR.A ? All considered, it still seems like a low volatility security.


----------



## gibor365

james4beach said:


> Thought I'd revisit this topic. On August 10, 2017, DFN fell on heavy volume. This coincided with this announcement of a new share offering: http://www.marketwatch.com/story/di...unces-overnight-offering-2017-08-09-151602418
> 
> Can someone explain what happened? Did they issue shares and dilute the existing shareholders?
> 
> Does this change the attractiveness of DFN.PR.A ? All considered, it still seems like a low volatility security.


Today DFN/DFN.PR.A again made announcement of a new share offering. Looks like they are doing it twice per year. Maybe we need to buy DFN/DFN.PR.A just after such announcement and sell 5 months later. Then wait to another announcement of a new share offering sometime in Aug 18 and buy it again?!


----------



## fireseeker

james4beach said:


> Can someone explain what happened? Did they issue shares and dilute the existing shareholders?


What happens is the overnight offering (as happened again this week) is priced below current market prices. That ensures good pickup, but it also temporarily deflates the market value of the existing shares. Over time, yield chasers tend to bid the shares back up again.
The prefs (both newly issues and existing) retain their underlying characteristics, I think, and therefore remain sound investments. 
HOWEVER, the new capital shares are being issued at a significant premium to underlying NAV (this is possible because of the yield chasers). If markets turn, these leveraged, premium-priced shares will get hammered.


----------



## gibor365

DFN will pay their 11% dividends unless NAV will drop below $15, now NAV is about $19-20. And even during 2008-9 big recession , DFN continued paying same dividends (not even talking about DFN.PR.A)


----------



## pacman

gibor365 said:


> Today DFN/DFN.PR.A again made announcement of a new share offering. Looks like they are doing it twice per year. Maybe we need to buy DFN/DFN.PR.A just after such announcement and sell 5 months later. Then wait to another announcement of a new share offering sometime in Aug 18 and buy it again?!


This is basically what I've been doing the last couple years. I haven't always timed it perfectly, but overall, it has worked out pretty well for me. I'm not much of a fan of the DFN, and stick primarily to the Pref portion of the split share.

pacman


----------



## gibor365

pacman said:


> This is basically what I've been doing the last couple years. I haven't always timed it perfectly, but overall, it has worked out pretty well for me. I'm not much of a fan of the DFN, and stick primarily to the Pref portion of the split share.
> 
> pacman


Me 2 , I hold twice more DFN.PR.A than DFN , DFN.PR.A offers pretty good yield around 5.2% and pretty save...

As per offering dates...they happened on:
Jan 16, 18
Aug 9, 17
Jan 26, 17
Jun 1, 16
May 13, 15
May 12, 14
Sep 24, 13
Thus looks like they do next offering not less than 5 months from previous one. Any guesses when will be the next?


----------



## pacman

gibor365 said:


> Me 2 , I hold twice more DFN.PR.A than DFN , DFN.PR.A offers pretty good yield around 5.2% and pretty save...
> 
> As per offering dates...they happened on:
> Jan 16, 18
> Aug 9, 17
> Jan 26, 17
> Jun 1, 16
> May 13, 15
> May 12, 14
> Sep 24, 13
> Thus looks like they do next offering not less than 5 months from previous one. Any guesses when will be the next?


I'll be selling in June sometime


----------



## gibor365

pacman said:


> I'll be selling in June sometime


That what I was thinking about.... Do you buying/selling only DFN or also DFN.PR.A?


----------



## pacman

gibor365 said:


> That what I was thinking about.... Do you buying/selling only DFN or also DFN.PR.A?


On new issues, I will sometimes participate, so yes, both. I find that in most cases, when I do, in hindsite, I should have simply waited and just purchased the DFN.PR.A. 
I also own some of the other Quadravest preferred splits, buying after their new re-issues at close to $10.00 FFN.PR.A & FTN.PR.A
I've also owned all of the PVS splits (Ie PVS.PR.E), but currently not an owner.

pacman


----------



## dubmac

I checked DFN on a lark - curious to see the yield on it during the recent downturn. I don't own it - but I do watch it - mostly out of curiosity.
DFN has paid 0.10 per month for the past 14.75 years, based on my research. recent events pushed it down to $6.17. (on Dec 24th 2008 it hit $4.95..lowest of the lows). The yield is now 15.85%....but that number seems meaningless given the past 14+ years - there are no periods of changing distributions.
If a person purchased 500 shares (7.5K investment) 14 years ago - it would diligently produce $600 income per year...for the past 14 years (around $8800). 
If a person did _speculate_ (emphasis on speculate), I can see the appeal on buying something like this -especially if one is a retiree.


----------



## humble_pie

dubmac said:


> I checked DFN on a lark - curious to see the yield on it during the recent downturn. I don't own it - but I do watch it - mostly out of curiosity ...
> 
> If a person did _speculate_ (emphasis on speculate), I can see the appeal on buying something like this -especially if one is a retiree.




not a buy. It's a ponzi scheme. Constant new share offerings buttress the preferred shares. Glitz, frills, razzle, dazzle, smoke, mirrors & options have hyped the common distribution during all these past years of bull market.


----------



## fireseeker

dubmac said:


> I checked DFN on a lark - curious to see the yield on it during the recent downturn. I don't own it - but I do watch it - mostly out of curiosity.
> DFN has paid 0.10 per month for the past 14.75 years, based on my research. recent events pushed it down to $6.17. (on Dec 24th 2008 it hit $4.95..lowest of the lows). The yield is now 15.85%....but that number seems meaningless given the past 14+ years - there are no periods of changing distributions.
> If a person purchased 500 shares (7.5K investment) 14 years ago - it would diligently produce $600 income per year...for the past 14 years (around $8800).
> If a person did _speculate_ (emphasis on speculate), I can see the appeal on buying something like this -especially if one is a retiree.


A very crude analysis:
$7.5K investment in DFN in 2014
$9,400 in income (including 2019, when the fund is due to terminate)
$3,350 in return of capital at windup (based on current reported NAV of $6.70 per capital share)
$12,750 in simple total return
CAGR = 3.6%

CAGR for XIU over the same time period (2004-2019) = 6%

(Both scenarios assumes zero capital gain/loss for 2019. XIU reflects reinvested dividends)


----------



## dubmac

fireseeker said:


> A very crude analysis:
> $7.5K investment in DFN in 2014
> $9,400 in income (including 2019, when the fund is due to terminate)
> $3,350 in return of capital (based on current reported NAV of $6.70 per capital share)
> $12,750 in simple total return
> CAGR = 3.6%
> 
> CAGR for XIU over the same time period (2004-2019) = 6%
> 
> (Both scenarios assumes zero capital gain/loss for 2019. XIU reflects reinvested dividends)


like I said. I don't own it..I watch it..mostly out of curiosity. 
- so not going to get into the nuts and bolts. 
good feedback tho ..I like it...


----------



## Eclectic12

fireseeker said:


> ... $3,350 in return of capital (based on current reported NAV of $6.70 per capital share)


I will have to check as I thought previous review of the documents said that eligible dividends were what the cash paid was classed as.




fireseeker said:


> ... (Both scenarios assumes zero capital gain/loss for 2019. XIU reflects reinvested dividends)


Were the DFN dividends calculated as being re-invested as well?


Cheers


----------



## fireseeker

Eclectic12 said:


> I will have to check as I thought previous review of the documents said that eligible dividends were what the cash paid was classed as.
> 
> 
> 
> Were the DFN dividends calculated as being re-invested as well?
> 
> 
> Cheers


Eclectic, ROC refers to the money that would be returned at windup, not the monthly distributions. (I haven't checked the composition of the distributions.) In this scenario, there would presumably be a capital loss on the 15-year holding. For investors with offsetting gains, this may be beneficial.
I did not calculate reinvested dividends for DFN, which would improve its return.
As I said, a crude analysis ...


----------



## humble_pie

fireseeker said:


> Eclectic, ROC refers to the money that would be returned at windup



only the preferred shares are protected in the windup (note: protected, certainly not guaranteed). The repeated new offerings are to protect the capitalization of the preferred shares, according to prospectuses i've read. The class A shares might not receive anything at all.


----------



## Eclectic12

fireseeker said:


> Eclectic, ROC refers to the money that would be returned at windup, not the monthly distributions ...


Which will depend on a windup happening ... with a 2004 start with typical run times of five years - it is not clear whether it will be continued as had happened in the past or wound up.

If the windup does happen, the key question is whether the NAV proceeds support paying more than what the preferred shares get paid first. I'd have to check to see if the current NAV is likely to return anything to the class A holders.




fireseeker said:


> ... (I haven't checked the composition of the distributions.)


With a bit of digging, it seems that there was one 2007 RoC special payment of $2.25, where the rest is spot checked to be classed as eligible dividends.




fireseeker said:


> ... In this scenario, there would presumably be a capital loss on the 15-year holding. For investors with offsetting gains, this may be beneficial.


Likely ... though I see it as more of leveraged bet for a relatively short term holding. Early 2009 would have worked well.


Cheers

I did not calculate reinvested dividends for DFN, which would improve its return.
As I said, a crude analysis ...[/QUOTE]


----------



## james4beach

I have a feeling that once we enter a bear market, DFN (common and preferred) will plummet. It's one of those "when the tide goes out, you see who's been swimming naked" kind of things.

IMO this thing is too strange to survive a real bear market. Strong bull markets make it hard to tell which ideas are bad ones. And this thing invests in financial stocks, which have been in a very strong bull market in the last few years. That won't last forever.


----------



## humble_pie

this "thing" is by no means the only engineered hybrid of its kind. It just happens to be the one that cmf forum focuses on, since there've always been a few hi-dividend addicts in the forum no matter what the quality of the dividend payor.

DFN doesn't only do financial stocks. Originally it did the top 15 TSX stocks by capitalization. Naturally these included a lot of banks.

but they were selling call options too close to the money, therefore in a bull market they began consuming themselves with assignments plus forced reinvestment into the same 15 stocks at higher prices. 

a few years ago DFN sought shareholder approval to sell options other than the top 15 underlyings. It was a way of halting the self-cannibalization. They did not state what those other companies would be.

alas it's a fact that when one sells options, one needs a counter-position as a hedge. It can be either the stock itself or it can be another option, but a short option position nearly always needs a hedge (it's true that one can sell naked options; however those are so extremely risky that i would think the regulators would never allow the DFN managers to do this)

the question then becomes What are those undisclosed long counter-positions that DFN is holding in order to hedge the un-named short options?

one can see the weakness of the canadian regulators here. Like ETFs, DFN is permitted to hold possibly outrageous derivative positions without having to disclose the details of each such position in its annual & semi-annual financial statements. 


.


----------



## Eclectic12

james4beach said:


> ... IMO this thing is too strange to survive a real bear market. Strong bull markets make it hard to tell which ideas are bad ones. And this thing invests in financial stocks, which have been in a very strong bull market in the last few years. That won't last forever.


The early 2009 low seems to have been about $4.91 so with today's close at $7.71 ... it seem to have a bit under $3 still to drop.


Cheers


----------



## dubmac

humble_pie said:


> this "thing" is by no means the only engineered hybrid of its kind. It just happens to be the one that cmf forum focuses on, since there've always been a few hi-dividend addicts in the forum no matter what the quality of the dividend payor.


thanks for this HP
part of the reason for raising this matter is that my mum (90 yrs, now in a monitored care home which is somewhat expensive) has some of her $$ with an advisor/broker who has invested some of her pf in a split corp company - LBS is one which has been mauled by the recent drop. Another is DGS.PR.A - which dropped, but since recovered. 
LBS was around 10 per share in May when I checked mum's pf last summer- now it is around 5. ugh! I am hoping that he got rid of it because he predictied the markets were heading down, and would expect that he would move out of suspect products - but I shake my head at some of these "advisors"
There will likely be a few phone calls may in the coming weeks. 
Thanks all for your feedback - fireseeker, HP & others - on some of the nuances of these types of products.


----------



## fireseeker

dubmac said:


> part of the reason for raising this matter is that my mum (90 yrs, now in a monitored care home which is somewhat expensive) has some of her $$ with an advisor/broker who has invested some of her pf in a split corp company - LBS is one which has been mauled by the recent drop. Another is DGS.PR.A - which dropped, but since recovered.
> LBS was around 10 per share in May when I checked mum's pf last summer- now it is around 5. ugh! I am hoping that he got rid of it because he predictied the markets were heading down, and would expect that he would move out of suspect products - but I shake my head at some of these "advisors"
> There will likely be a few phone calls may in the coming weeks.


It's not clear from your posts whether your mum is invested in the capital shares or the preferred shares of these split-share products. 
DGS.PR.A is the preferred part of Dividend Growth Split. Your original post (#144) seemed to be about capital shares.
The LBS capital shares have indeed been crushed to $5 and change, but the preferred shares are still trading near par ($9.80 at last close). The total unit value is almost $16, and the preferreds get first claim on that up to $10.
DGS is a little dodgier, with a total unit value of about $13.40. However, the dividend on the capital shares appears to have been suspended (because total NAV is below $15), which will greatly help support the value of the preferred shares.
Split-share preferreds can be a good choice for conservative, older investors seeking income. Don't be too hasty to bail on those. 
The capital units are leveraged, expensive (high MER) and risky.
For reference, LBS info is here:

http://www.bromptongroup.com/product/life-banc-split-corp/


----------



## dubmac

here's what I see on the May 2018 details of your investments (CIBC Wood Gundy). I have included the assets that are most concerning to me - there are others that I am not as concerned about. (For example - he moved her out of ENF and into IPL, which did drop from around 23 to 19!), but she is drawing down alot on the distribution which he feels is safe with IPL. 

Here's a picture of the "Most Wanted" - Most wanted information that is. (CPG has dropped like a everything in oil this past month). Some of these position are larger than others. Interestingly, some have big differences between the Unit cost and the price per share on any given day of trading. For example: the unit cost on LBS is $1.851, but the Value on May 2018 was $9.80, and is now $6.68. ...so, it would appear that between May 2018 to present (Jan 1, 2019) has suffered a big drop -31.8%, it would appear that the asset has actually increased from $1.851 to $6.68 = a gain of 260%!! But then, I am trying the figure this stuff out!

Life and Banc Split Corp Class A LBS.TO
Dividend Growth Split Corp. Preferred Shares DGS.PR.A
Crescent Point Energy CPG
Enbridge Inc.Cum Red Min RT PFD SHS S17 ENB.PR.I
Financial 15 Split Corp 5.25% Cum Red. Retr Pfd FTN.PR.A
Cdn. Life. Co.’s split corp 2012 Pfd shares LFE.PR.B

Which of the above most wanted would you consider to be most concerning? 
I realise that no one can predict the future, but I am operating on the assumption that 2019 will be a mild recession, with the TSX in the 13,500 to 14 K range.


----------



## fireseeker

A few observations:
--None of the preferred shares are investment grade. This doesn't make them bad, necessarily, but it does make them riskier. Their dividend coverage has been hurt by the fall slump. It appears the advisor was reaching for yield.
--Along with DGS, it looks like LFE and FTN have also stopped paying dividends on the capital units. 
--I would not consider the LBS capital shares suitable for a 90 y/o person. Hard to figure why it's there, other than the cynical assessment that structured products like split shares pay fat fees to brokers.
--I'm guessing that the reason LBS has such a low cost base is because of ROC distributions. 
--LBS last traded at $6.44 (Dec. 31). Its last reported NAV (Dec. 27, one trading day earlier) was $5.86.


----------



## dubmac

thanks fireseeker. This will help to form the basis of a conversation with a few folks on my end. Much appreciated.


----------



## humble_pie

wondering if the financial splits in the 90-year-old's portfolio were all underwritten by CIBC wood gundy. If they were anything like DFN, there would have been repeated re-financings, repeated secondary offerings.

commissions for secondary public offerings are usually high, even higher than regular full-service broker commissions. It's easy money (note: it's the issuor that pays the commission, not the ultimate buying investor.)

it would have been a cinch for an advisor to salt such shares into the portfs of most of the seniors in his clientele, using the argument that the seniors would benefit from the high income.

some thought should be given to the proportion of these weak/iffy holdings in this particular senior's total portfolio. If altogether the weak list adds up to 10% of the portf while elsewhere the senior has very healthy gains from well-chosen stocks, then perhaps a complaint is more trouble than it's worth.

as for crescent point, i would not be a seller now. The big 2018 tax loss selling just ended, stock is likely to stabilize. Though CPG is selling top quality bakken light crude & not tar sands bitumen, company has still been tarred with the same panic brush that hit the entire oil sector past few months, not to speak of years.

if CPG is to be treated as a loss, one would want to manage this carefully, imho. Identify which holdings in the mother's portfolio have big gains & plan to use a loss such as CPG to sort those gains back down to neutral-no-taxable-gain.


.


----------



## Eclectic12

dubmac said:


> ... Interestingly, some have big differences between the Unit cost and the price per share on any given day of trading. For example: the unit cost on LBS is $1.851, but the Value on May 2018 was $9.80, and is now $6.68. ...so, it would appear that between May 2018 to present (Jan 1, 2019) has suffered a big drop -31.8%, it would appear that the asset has actually increased from $1.851 to $6.68 = a gain of 260%!! But then, I am trying the figure this stuff out!


Unless there is some reason to question the cost number and/or the trading price - the capital gain part seems to be understood. 

I suspect what you are having trouble with is the split share structure. In a nutshell, the preferred shares have windup proceeds priority as well as income priority while the capital shares don't. Because the common share value/income is split between the two, the capital shares tend to be leveraged. 

The price movement for the capital shares are a lot more volatile than the preferred shares

For example, years ago the TransCanada Pipe split capital share was worthless but traded for $1. About two years later as the common shares had doubled, the split share traded for $7 (a much larger gain). 


Split share corps typically have a five year period before there is a vote to extend or windup the corp so in addition to the usual "should I sell", there is a time factor involved.






dubmac said:


> ... Which of the above most wanted would you consider to be most concerning?


I would have to do more checking but as there it appears most of the split corps are the preferred shares, I would say the top two CPG and LBS. I would have put LBS first as it is volatile plus not something I see as suitable for a senior to be in, except possibly in small quantities ... but you say it is still a gain where CPG is unknown.

Next I would make sure the preferred share split corps DGS-PA.to and FTN-PA.to still have priority as well as when their voting date is. If the ratio is one capital to one preferred share where the NAV exceeds the preferred share windup price then you should be able to take your time deciding as the priority is likely still in place. I have seen some split share corps that had a four capital shares to one preferred share ratio so checking the prospectus may be important.

The capital share are more volatile plus likely have had their income cut so IMO, they are the first priority to investigate/deal with.



Cheers


----------



## dubmac

Thanks again HP, Fire-seeker, Eclectic. You folks are gold. I appreciate the light that you have shed on these matters.

I did have a very civil conversation with the broker having digested, as much as I can digest - your feedback. My brain tilts a little when I need to engage in a conversation about the ratio between the capital and preferred shares in the fund. I'm getting some of the details, but I am a 1960's vintage. 

bottom line here is the overall performance on the retirement assets of my mum is in the -4 to -4.5% mostly due to the mayhem in Dec. The accounts crank out income for her, as predictable as one can expect I think. Yes, as fire-seeker has pointed out, there are issues around the quality of some preferreds. And yes, LBS and CPG were discussed in detail.

Mr. Broker man said yes - he will likely be selling some of the LBS in the coming months - as he expects some recovery in the price. As for CPG, he is holding, and expects some recovery - he talked about the root causes for the oil drop (trump and his policies on getting Saudis to limit (? i think) oil exports, and the fact that US produces alot of oil now... . I asked why not (have) sold some CPG in Dec 2018 to help offset cap gains - he said that my mum had no cap gains to offset in the past year. 

thanks again...


----------



## Eclectic12

dubmac said:


> Thanks again HP, Fire-seeker, Eclectic. You folks are gold. I appreciate the light that you have shed on these matters ...


You are welcome. 

I'm trying to give back what I have received from others on different matter.




dubmac said:


> ... My brain tilts a little when I need to engage in a conversation about the ratio between the capital and preferred shares in the fund. I'm getting some of the details, but I am a 1960's vintage.


Don't let it stress you too much. IMO where it applies for you to to help sort out whether the priority for the preferred shares is still in place.

Usually the web site has the prospectus ... it takes a bit of reading but is typically early on in the prospectus. If not, there is the SEDAR web site that can be searched.
FTN link ... https://www.quadravest.com/ftn-fund-documents
Sedar link ... https://www.sedar.com/homepage_en.htm




> bottom line here is the overall performance on the retirement assets of my mum is in the -4 to -4.5% mostly due to the mayhem in Dec. The accounts crank out income for her, as predictable as one can expect I think ...


If it is one year then it is not too bad as in the "5 pack thread", the comment was:


> 2018 was a good year for the 5 pack. The portfolio returned -4.8% for the year. In comparison, XIU returned -7.8% and XIC -8.7%
> The 2018 result was significantly better than the TSX Composite. The official year end iShares numbers aren't out yet but I think they will be similar.


https://www.canadianmoneyforum.com/showthread.php/118842-quot-5-Pack-Approach-quot/page21


If it is a longer time frame, it might not be so good.


Either way - I only typically had capital shares for short-ish periods so I'm not sure it is appropriate (ex. bought in Mar 2009 then collected dividends for a while then sold in something line two years).


Cheers


----------



## james4beach

james4beach said:


> I have a feeling that once we enter a bear market, DFN (common and preferred) will plummet. It's one of those "when the tide goes out, you see who's been swimming naked" kind of things.
> 
> *IMO this thing is too strange to survive a real bear market*.



Well I'm going to say I was right on this one. And many of us saw this coming; humble_pie has been warning about this for years!

DFN.PR.A was engineered to look like a low volatility fixed income security. For a long time it pulled it off! It only had a brief drop in early 2016 when it fell 5% from a peak price but that really looked like the worst of it. That's only 5% drawdown (hardly any volatility at all) while it kept performing at 5.2% CAGR. Too good to be true.

But in this recent market crash, it fell as much as 26%. Ahhh now it's no longer 'too good to be true'.

I've attached a chart. This excludes dividends and shows just the preferred share price. As you can see, the price was stable around $10.25 for many years (while paying its yield), until it suddenly crashed as low as $7.56

Now the unit holders have a serious dilemma on their hands. Do they hold onto this and hope to keep getting their steady $0.55 annual dividend with the knowledge that the price could fall further? They've already effectively lost two years of dividends in the price drop.

And if the price falls back to its March low, that would wipe out 5 years of dividends. What will the share price be by the time you are "done" investing in this?

Maybe the price gets back to $10, or maybe it doesn't. Maybe selling and getting out now leaves you with the most money in total. It's the classic problem with "dividend investing". You try to ignore share price, but ultimately, you really can't do that. You will be forced to deal with the market price at some point.


----------



## agent99

james4beach said:


> Well I'm going to say I was right on this one.
> Maybe the price gets back to $10, or maybe it doesn't. Maybe selling and getting out now leaves you with the most money in total. It's the classic problem with "dividend investing". You try to ignore share price, but ultimately, you really can't do that. You will be forced to deal with the market price at some point.


James,
Do you have a good grasp on how split corporations work? You can't compare this split preferred with conventional dividend paying stocks. Split pfds are more like bonds. The drop in market value was about same or even less than many stocks. And less than some. (I won't mention names  )

By the way, DFN.PR.A recovered to something over $9.00 recently(**) Given the current market, that provides about the right yield for risk involved. About same as corporate bond or conventional preferreds.

It is the capital shares that owners should be concerned about. Some split capital shares got down close to zero. DFN which was, I believe, issued at $15.00 got down to $3.55 at one point. Overall NAV had dropped from $25 at issue to under $15.00 - Of that $10.00 is the preferred value. The capital shares are hit doubly hard when market value of underlying stocks drop and they have no requirement to make any distributions. All dividends go to the preferreds side and that is how they are able to distribute about double the yield of the underlying portfolio. I don't believe there is any option for them to reduce the preferred distribution. (I have not looked at prospectus for loopholes)

The initial large drop in price of the preferreds was likely due to market sentiment - it dropped until dust settled.

Split corporation preferreds are very much like bonds. A corporate bond with fixed maturity would drop in value in same way if market deems corporation is at risk.

I sold all of my split preferreds. This because at 80+ and considering current situation, I decided to de-risk my overall portfolio. My split preferreds had, however, served me well for many years.

** - For the record, I sold mine at $8.90 - later reached $9.14!


----------



## Eclectic12

I can't help wondering if James misunderstands or whether the temptation to post about being right was too enticing.

Don't get me wrong ... warnings that DFN.PR.A is equity based, has a confusing structure and does not have the same level of guarantee as say a GIC are fine.

At the same time, for some reason James is ignoring the NAV as well as the fact that trading prices can vary from the underlying situation.

An investor who sold at say $7.56 a while ago is going to have a loss. 

The April 7th NAV, net of distribution says that if a windup occurred that a preferred share investor would get $10 as $14.41 is what was listed for a 1:1 combo of preferred and capital units. I'm sure they'd be costs to a windup that would whittle away at the $4.41 buffer but it is seems doubtful it would be enough to eat into the promised $10 a share.

Without some sort of fraud in calculating the NAV, until it goes below $10 and stays there ... the preferred shares are still worth $10, no matter what the trades go through for. Same as years ago, HBC real estate was conservatively valued at something like $12 a share where the trading price was something like $8 IIRC.


Cheers


*PS*
XIC has been steadily going up this week so it wouldn't be surprising if the NAV has improved.


----------



## james4beach

So the preferred shares are worth $10 (you say), and yet market participants think it was worth at one point nearly 30% less.



Eclectic12 said:


> The April 7th NAV, net of distribution says that if a windup occurred that a preferred share investor would get $10 as $14.41 is what was listed for a 1:1 combo of preferred and capital units.


I'm not certain that you guys (agent99 and Eclectic12) understand this structure as well as you seem to think. I definitely don't understand it and I suspect that very few people do.

This thing is riddled with hidden risks. The market seems to be telling us that.



Eclectic12 said:


> until it goes below $10 and stays there ... the preferred shares are still worth $10, no matter what the trades go through for.


I have serious doubts about this, though you seem quite certain.

If this really is worth a solid $10, institutions would have grabbed that free money and they would still be buying the shares today.

Why aren't they?


----------



## andrewf

The preferred share is kind of like a covered call. There is risk of loss, but only if the class A shares are wiped out (the underlying is below the 'strike price'). This is obviously risk.


----------



## james4beach

So there's some kind of non-linear investment risk, plus (I assume) credit risk as well. Since they employ leverage, I would assume there is risk of margin calls and potential fallout from credit tightening. Depending on what kinds of derivatives they use, there could also be counterparty risk (more credit risk).

Basically it's a sophisticated hedge fund, with public units that even a 90 year old mother can hold! See earlier post: How is it possible for DFN to earn 10%+ yield?

And I'm sure the seniors, including this 90 year old, can appropriately model and understand the non-linear / leveraged risks?

There are some people (not me I'm sure) who might, if they found out their mom was sold one of these, track down the advisor and pay him a visit. A thorough and productive discussion of risk might ensue.


----------



## fireseeker

Split shares are definitely instruments that are sold, not bought.
So, yes, I agree with James that many people have wound up owning units without understanding them and their risks.
That said, they can be reasonable investments.

To address James's questions in post #167, I would wager that some institutional investors may well have bought DFN.PR.A. But you must consider the context: there were all kinds of opportunities for smart money in mid-March. Some of the banks were yielding over 8%. Some companies were trading below book. Corporate bonds were basically untradeable, at any price. Preferred shares -- a classic investment for 90-year-old grandmothers -- were destroyed. Even government bonds sold off!

The preferred side of DFN dropped below $10 because the general market sentiment was risk off. It simply moved with the market. Buyers wanted a huge margin of safety -- and they got it. You could buy $14 of potential value for $7.50. (Actually $10 of value, with $4 of downside coverage.)

The crucial thing is that the return wasn't guaranteed -- just as it wasn't for CM or for corporate bonds. The holdings of DFN could continue to fall. The economy could enter a Depression. As a holder, you might wind up with less than $7.50. But that is normal investment risk.


----------



## andrewf

There is no leverage. The class A shares are leveraged by being financed using the preferred share. The pref share is only entitled to a 5%ish yield on the original $10 value and the residual value accrues to the class A shares.

The flip side of the preferred shares dropping well below $10 is that the class A shares remained above their NAV value due to the implied call option.


----------



## agent99

Luckily, there are people who do understand split preferreds. For example rating agencies like DBRS & S&P provide ratings for split preferreds just like they do for other preferreds and bonds. DFN.PR.A recently had a pfd-3 rating. Other splits pfd-2L to pfd4. A few not rated (because it apparently costs company a lot to get rated!)

The preferred guru, James Hymas often comments on them and has owned them in his own funds. He is sometimes critical of them, or at least the companies running them. When he is critical, it means something - unlike those who are critical just because they think splits are too complicated! There are a lot of more complex investments on offer. Especially "real" preferred shares.

As I said before, I have owned split preferreds for a long time - almost 20yrs. Never a problem. Risk starts to increase as the NAV of the overall fund moves downwards. The risk, I suppose, is that the split corporation will fold. If the NAV is still above $10.00 pfd share holder will get all or most of their capital back. Capital share holders are SOL.

Some splits hold just one company's shares, others a few, like say all the big banks, others more, like DFN's 15. Take a big bank split for example. The 5 big banks stocks would have to really tank before the NAV gets down to $10 and has an impact on the preferreds share of NAV.

My concern with splits, at least in bad times like now, is the capability of the managers of the split corporation to stay in business.

Just like with any investment, an investor needs to take the time to understand what they are buying. For a start, read the prospectus.


----------



## Eclectic12

james4beach said:


> So the preferred shares are worth $10 (you say), and yet market participants think it was worth at one point nearly 30% less ...


Quadravest, the fund manager publishing the NAV says so ... I am simply the messenger, pointing out what you seem to have missed.




james4beach said:


> ... I'm not certain that you guys (agent99 and Eclectic12) understand this structure as well as you seem to think. I definitely don't understand it and I suspect that very few people do ...


Valuing it IMO is the problematic part ... not understanding the structure.

What's hard to understand that for each preferred share, a capital share is issued (i.e. 1:1) with the underlying portfolio carved up according to the prospectus, should it be wound up.




james4beach said:


> ...This thing is riddled with hidden risks. The market seems to be telling us that ... I have serious doubts about this, though you seem quite certain ...


And you've never known the market to be wrong or have panic selling ignore values?

I gave you an example where the market was letting one buy HBC for less than their RE was worth. When they took it private some years later, in addition to the dividends, the buyout share prices was something over $15.




james4beach said:


> ... If this really is worth a solid $10, institutions would have grabbed that free money and they would still be buying the shares today.
> 
> Why aren't they?


Small volumes ... after all, this is the largest one where a couple of years ago, AUM was something like 750 million. 

The other question is how do you know that some aren't dabbling in it?


Cheers


----------



## james4beach

Look guys, I'm not critical because I don't understand them. I am critical because they smell fishy, they seem deceptive, and they feel like the kind of complicated mess that is intended to be sold to unsuspecting bag-holders (such as seniors).

I realize that _some_ people understand them, and that it's possible to understand them. This is not in dispute. Obviously there is somebody somewhere who understands them.

I don't like these because they are complex, opaque, and have tricky clauses throughout the prospectus. *My assertion: they are intentionally tricky.*


----------



## Eclectic12

james4beach said:


> So there's some kind of non-linear investment risk, plus (I assume) credit risk as well. Since they employ leverage, I would assume there is risk of margin calls and potential fallout from credit tightening. Depending on what kinds of derivatives they use, there could also be counterparty risk (more credit risk) ....


Did you read the prospectus? Or how about general articles about split share corps?

The leverage for the capital shares is coming from the defined rules (i.e. at windup, the pref share gets $10 first, all the rest goes to the capital shares). They aren't using leverage internally on a broad basis like you are writing about so AFAICT margin calls are a figment of your imagination.






Split share corporation - Wikipedia







en.wikipedia.org






There is more risk than there used to be when the structure was a pure split where preferred shares received all the dividends and capital shares received all the capital gains with no dividends.




james4beach said:


> ... Basically it's a sophisticated hedge fund, with public units that even a 90 year old mother can hold! ...
> There are some people (not me I'm sure) who might, if they found out their mom was sold one of these, track down the advisor and pay him a visit. A thorough and productive discussion of risk might ensue.


I'm surprised ... you aren't normally using a straw man that misrepresents the product and writes false info about what's recommended. (I know I haven't recommended mother or grand-mother to buy this.)

If you decide you want to talk about the product instead of your fantasies or fictional recommendations to mother and/or grandma ... maybe we can restart the conversation. As long as you want to write what's in your mind without bothering to see if it's accurate or relevant ... I'm out.


Cheers


----------



## agent99

James, they are not deceptive. As with any investment, read the prospectus and try and understand what it says before buyingSame as when buying bonds or etfs or mutual funds or.... There are dozens of splits. They are far less complex than regular preferreds or things like convertible debentures.

Only confusion, is calling them preferreds because they are not what most people understand by the term.

This whole thread has been confusing. It started off as being about DFN with 10% yield. DFN.PR.A did not have a 10% yield! Right now it is about 6% and it has NEVER been 10%! DFN may have.

Right now, anyone who bought this split for $10, would be down $1.00 (10%) now. Meanwhile, they would have been collecting 5.5% yield on the $10 for as long as they have owned them. Not many other things doing that well these days!


----------



## james4beach

I stand by my position that they are intentionally tricky. They are not just complex because of some inherent need for complexity. They are deliberately made to be tricky.

And yes, they are like having units in hedge funds, except they are sold to unsuspecting retail investors.

Pure garbage and any advisor selling these to clients should be ashamed of themselves.


----------



## Eclectic12

james4beach said:


> Look guys, I'm not critical because I don't understand them ...


Your comments that are wrong as well as questionable resorting to involving dear old ma instead of sticking to the discussion say otherwise.




james4beach said:


> ... any advisor selling these to clients should be ashamed of themselves.


CMF seems to be mostly DIY types so I doubt advisors are coming here for ideas or will pay attention to your POV. 


Cheers


----------



## agent99

As my Dad used to say - "its' not very often you are right, but you are wrong this time  "


----------



## james4beach

Eclectic12 said:


> Your comments that are wrong as well as questionable resorting to involving dear old ma instead of sticking to the discussion say otherwise.


I linked to message # 155 (did you read it?) in which an advisor got dubmac's 90 year old mother into splits.

Uninformed investors buying these things is very much the point of discussion. My point is that these are deceptive, deliberately complex financially engineered products.

It doesn't matter that you and agent99 understand them; I am not concerned about you.


----------



## Eclectic12

agent99 said:


> ... The risk, I suppose, is that the split corporation will fold. If the NAV is still above $10.00 pfd share holder will get all or most of their capital back. Capital share holders are SOL.


Which some did during the financial crises.

More recently, someone bought OSP-PA six months ago, expecting the March 2020 special retraction privildge to let them get out even. Trouble was that by that time, everything had been hammered so much that the preferred were worth $5 instead of the $10 they expected.




agent99 said:


> ... My concern with splits, at least in bad times like now, is the capability of the managers of the split corporation to stay in business.


I'm more concerned about hidden costs and what the portfolio does. At the end of the day, the portfolio is likely the biggest driver.


Cheers


----------



## andrewf

james4beach said:


> I stand by my position that they are intentionally tricky. They are not just complex because of some inherent need for complexity. They are deliberately made to be tricky.
> 
> And yes, they are like having units in hedge funds, except they are sold to unsuspecting retail investors.
> 
> Pure garbage and any advisor selling these to clients should be ashamed of themselves.


I don't agree. They are decompositions of the company into a 'safer' cash flow driven investment (still equity risk but somewhat insulated, like writing a deep in the money long term covered call), and a more speculative leveraged equity position. Some investors are looking for the former or the latter as part of their risk profile.


----------



## Eclectic12

james4beach said:


> ... It doesn't matter that you and agent99 understand them; I am not concerned about you.


Strange way of not being concerned about us with comments like:


> ... So the preferred shares are worth $10 (you say), and yet market participants think it was worth at one point nearly 30% less. *I'm not certain that you guys (agent99 and Eclectic12) understand this structure ...
> This thing is riddled with hidden risks ... *


Dubmac did whatever he did for his mother around Jan last year so I'm not sure what benefit is being provided for whom you are concerned for. 


Cheers


----------



## james4beach

OK then, so where do we land on this?

That the split structure is weird, but can still be understood.
That seniors are not systematically sold these things.
Most people buying them know what they're getting into.
Most investors understand the risk they're taking in them.
and,
dubmac's 90 year old mother is not the typical buyer [1]

Is that the argument?


[1] did not really buy, but has some advisor stuff them into their portfolio


----------



## agent99

james4beach said:


> Uninformed investors buying these things is very much the point of discussion.
> 
> It doesn't matter that you and agent99 understand them; I am not concerned about you.


Reading back through this long thread, I see several cmfers that actually did or do own and understand split corporations.
Also others who wished to learn more about them. And some others who have never owned them, yet have strong opinions.

Splits, are just one of many alternative security options investors can consider.
Some far less transparent products are palmed off on the unsuspecting public. Often to the sellers benefit, like mutual funds Dont get me on to bond funds!

With markets on rebound, maybe I shouldn't have sold all my split pfds!


----------



## Eclectic12

james4beach said:


> OK then, so where do we land on this?


First off I'd like to apologise for saying the sales to seniors were a misrepresentatio/red herring.. As you suspect, I didn't follow the link to the previous section of the thread.

The drop in value as well as the misleading structure and question as to whether the structure is understood weren't limited to that particular case, though.




james4beach said:


> ... That the split structure is weird, but can still be understood ... Is that the argument?


No ... it's that most of what is being criticised is either misrepresented or operating as designed.

For structure, you've recommended XIU in the past so presumably you are okay with it's structure. If "portfolio - expenses, divided down equally to individual units" is clear, what's so complicated about "portfolio - expenses dividend equally into preferred shares that have a promise of priority on windup and capital shares with no promise"?

Isn't XIU's alleged prospectus that's really amendment #3 to the original prospectus plus amendments #1 and #2, at something over 200 pages more confusing/difficult? DFN's prospectus at something over forty pages seems an example of brevity.


For the preferred shares recent drop despite the long time at or above the promised windup price of $10, the preferred shares should trade for what buyers are willing to pay ... regardless of the four years from now promise and current NAV. I believe XIU traded at a discount to NAV so a disconnect from the NAV isn't an indication of problems. If XIU is trading as designed, what makes the DFN preferred shares trading and discount to NAV suspect or proof of problems?


As for the 90 year old whose advisor made mistakes ... let's try a thought experiment. A bank split was mentioned as a problem, if it was a suite of bank common stock that was mauled - would the advisor be criticised or both advisor and common stock?


Cheers


----------



## agent99

Give it up electric - we have beaten this one to death


----------



## james4beach

It seems that DFN has been kind of a crummy investment, even after the big market rebound. The 5 year cumulative total return of DFN is 41% whereas pure bank stocks, XFN, returned 68% .... so for some reason, the leveraged financial portfolio is doing much worse than the financial sector.

Well that sucks. Let's see if the magical preferred shares are doing better.

The 5 year cumulative total return of DFN.P.A is +22% and it was going relatively smoothly until the COVID crash. At that point there was a brutal 28% drawdown.

Since this was engineered to look like fixed income, let's compare that to a pure bond fund. The 5 year cumulative total return of VAB is +14% and the COVID crash drawdown was -14%

So are you "winning" if you gain +22% and crash -28% along the way,
when you could have gained +14% and crashed -14% along the way?

Yeah, the preferred shares do in fact look more fixed income-like. This isn't too horrible, but I suspect if you run the numbers the preferred shares are a worse risk-adjusted return than a bond fund.

DFN, the capital part, was actually performing on par with XFN from 2005-2018 but seems to have lost its mojo in recent years.

Overall, Dividend 15 is a pretty sad story. With all that engineering and leverage, they couldn't create something which outperformed XFN and also couldn't perform better than a dumb old bond fund, in risk-adjusted term. What's the point, if you can't beat "plain vanilla" portfolio components?


----------



## james4beach

Visual aids, showing how the different share classes have performed in the long term. Maybe it wasn't right to use XFN in my last post, since the portfolio does have some non financials in it. Using the TSX 60 as a reference might be more appropriate.

First chart shows relative performance, DFN divided by XIU, total returns. If it was a flat horizontal line, the two would be performing identically. With the line going downward, you're seeing DFN underperforming the market with rather significant drops at times.










Second chart is the same kind of thing, with the preferred share divided by XBB. Here you can see that the line is mostly flat (preferred shares are acting like fixed income) and the preferred shares are even slightly ahead as of today. However, this has also come with extra volatility, notably the 2008 and 2020 crashes.










Here's another view. This shows the preferred shares (pink line) versus XBB (black line). The preferred shares were in fact steady much of time, but had some sharp drops. The total return performance has kept up with XBB, which is good, so you might say the preferred shares are a fixed income replacement.

But they are clearly not performing at 10% CAGR. The performance is more or less the same as XBB but with wilder crashes along the way.











Big picture, here's where it lands.

*Dividend 15 is no better than XIU and XBB*. The capital shares are clearly inferior to XIU, chronically underperforming.

The preferred shares, despite the sleight of hand trick of the 10% yield, _have barely outperformed XBB_. And they've had worse crashes along the way, two very sharp crashes. That's not what someone wants in fixed income.

What have we learned? There's no such thing as a free lunch. The Dividend 15 people were not able to beat market index ETFs, and on the balance of things (if you look at both share classes) actually created a worse investment than the dumb old indexes.


----------



## james4beach

andrewf said:


> I don't agree. They are decompositions of the company into a 'safer' cash flow driven investment (still equity risk but somewhat insulated, like writing a deep in the money long term covered call), and a more speculative leveraged equity position. Some investors are looking for the former or the latter as part of their risk profile.


If investors wanted leveraged equity to _beat the index_... they haven't gotten that.
If they wanted equivalent to the equity index... they didn't even get that. Sad.

If they want that safe-ish cash flow with a hint of equity risk, yeah, they did somewhat get that. But they could do it far more simply by just tuning the dial to mix XIU & XBB which would result in a superior risk-adjusted return. Even better if the investor mixes XIU & ZGB for pure govt bonds.

That would give the same result, same performance, with less risk.


----------



## dubmac

I would be surprised if the investors who buy DFN, or LBS split-shares are interested in beating the market.
These purchasers want yield - They want a steady income from their investment. That is really their only appeal. These retirees don't care whether they beat the market or not - they simply want to pay for their expenses. Advisors have had an easy time "selling" these products to advisors - until they collapse, as they did in March 2020.

My mum's advisor (before we fired him) had a big position in LBS split shares. These shares paid out 10% yield - but only when the shares price is above a minimum threshold. In 2020, the price was below the threshold for about 8-9 months - meaning she never rec'd the distribution, and the share price was in the toilet.

Thankfully, in Nov 2020 with the uptick in prices, the price bounced back - we switched advisors, and sold all the LBS.


----------



## AltaRed

My rule of thumb: The more financially engineered the product is, the further I stay away from it.


----------



## dubmac

AltaRed said:


> My rule of thumb: The more financially engineered the product is, the further I stay away from it.


that's a good rule to have.


----------



## fireseeker

james4beach said:


> Big picture, here's where it lands.
> 
> *Dividend 15 is no better than XIU and XBB*. The capital shares are clearly inferior to XIU, chronically underperforming.
> 
> The preferred shares, despite the sleight of hand trick of the 10% yield, _have barely outperformed XBB_. And they've had worse crashes along the way, two very sharp crashes. That's not what someone wants in fixed income.
> 
> What have we learned? There's no such thing as a free lunch. The Dividend 15 people were not able to beat market index ETFs, and on the balance of things (if you look at both share classes) actually created a worse investment than the dumb old indexes.


Very thorough post, James. Thanks.

A few comments:
1) The preferred shares do not yield 10%. They yield 5.5% on par. 
2) That pref yield qualifies for the dividend tax credit and is therefore significantly tax-advantaged. The XBB yield is all pre-tax. For an investor in a non-registered account, the after-tax return on DFN.PR.A versus XBB will be much better than the charts show.
3) The time frame on the chart is a period of consistently falling interest rates. It is possible that in a period of rising rates that split share preferreds will do comparatively better than XBB.
4) IMO, the financial engineering is disproportionately reflected in the capital units of splits. And it is the capital units that bear the full cost of the MER. The prefs can be reasonable, short-term investments with favourable cash flow. The capital units should never be bought at IPO or in an overnight offering, when they sell at premium to NAV. In fact, the capital units are rarely sound investments.


----------



## Tostig

YouTube has just introduced me to DFN and LBS yesterday.
Their holdings look the same as what I already hold: Banks, Insurance, O&G, etc
Betas are 1.83 and 2.15 and the stock charts look like their stock prices behave as any other individual stock you own. So if you like volatility on solid stocks, you can certainly buy on dips.

However, what makes their yields so high? DFN is currently 14.39% and LBS 12.45%. Their monthly dividend distributions have been $0.1 per share since inception.

From their websites (DFN Fund Features | quadravest, Life & Banc Split Corp. | Brompton Funds)
NAVs are $17.31 for DFN and $9.51 for LBS.

So what's making the current stock price so low compared to their NAVs?
What is a financially engineered product? Is there something is their names "split corp" that tells us something risky is going on like leveraged ETFs, TQQQ?

Please excuse me if all this has already been discussed in the previous ten pages.


----------



## fireseeker

Tostig said:


> YouTube has just introduced me to DFN and LBS yesterday.
> ...
> Please excuse me if all this has already been discussed in the previous ten pages.


Rather than have CMFers retype previous comments, I suggest reading the existing posts. Most of the answers you seek are there. 
If you still have questions after doing that, you can ask them then.


----------



## Tostig

fireseeker said:


> Rather than have CMFers retype previous comments, I suggest reading the existing posts. Most of the answers you seek are there.
> If you still have questions after doing that, you can ask them then.


This sounds like the kind of answer you'd get from a flat earther who doesn't have an answer.

I read through the first page and the last page. Can you direct me where in the remaining 8 pages in between that explains why the stock price is so much lower than the NAV?


----------



## andrewf

Tostig said:


> This sounds like the kind of answer you'd get from a flat earther who doesn't have an answer.
> 
> I read through the first page and the last page. Can you direct me where in the remaining 8 pages in between that explains why the stock price is so much lower than the NAV?


The NAV has to cover the $10 face value pref share. DFN is 8.35 and DFN-A is 10.15 = 18.50 vs NAV of 17.31 (as of May 14).


----------



## MrMike

dubmac said:


> I would be surprised if the investors who buy DFN, or LBS split-shares are interested in beating the market.
> 
> These purchasers want yield - They want a steady income from their investment. That is really their only appeal. These retirees don't care whether they beat the market or not - they simply want to pay for their expenses. Advisors have had an easy time "selling" these products to advisors - until they collapse, as they did in March 2020.


I love this post! @james4beach, you are awesome and very smart but I apologize, most of what you said on this page is over my head  and you clearly do a lot more research than I and I'm sure have better returns. I've made piece with being a small fraction of the investor you are. I'm also a small fraction of a chef. So without aiming for the top.....

I have a friend that purchases a lot of this and I was thinking of putting a small amount in soon. And like @dubmac said, we're only interested in the yield.

That being said, I understand the dividend was frozen during COVID but that's a once in a lifetime event (or 2 or 3 times, like 2008 financial crash). So outside of big events that happen every 10 years, is this a good stock for income? I define good as in they always pay the same dividend every period (i think this is monthly?).


----------



## agent99

Tostig said:


> This sounds like the kind of answer you'd get from a flat earther who doesn't have an answer.


First thing to learn, is to use the forum search option. Your answer sounds like it comes from someone who doesn't know that and wants to be spoon fed. (that is the polite version of my comment  ) Split corporations have been discussed many many times here and elsewhere. Try Google.


----------



## Tostig

agent99 said:


> First thing to learn, is to use the forum search option. ...Try Google.


How do you think I found this thread? The last post before mine certainly wasn't on the "New" list.

It was either resurrecting this zombie thread or starting a new one, in which somebody will inevitably respond with a link to this one.

Well, I did look through all ten pages and it's all a bunch of back and forth whether structure is high risk or not. Nobody actually crunched out some numbers until my post was answered.


----------



## MrMike

Tostig said:


> This sounds like the kind of answer you'd get from a flat earther who doesn't have an answer.
> 
> I read through the first page and the last page. Can you direct me where in the remaining 8 pages in between that explains why the stock price is so much lower than the NAV?


I generally agree with Tostig, however, the flat earther remark was uncalled for.

If I ask a question, saying "its been answered, just search" isn't helpful. provide links, be helpful. be nice. If the answer to my question is "just google it" then you are not being helpful.

but @Tostig , don't insult people. they wont like you and wont be helpful. you should apologize


----------



## andrewf

Tostig said:


> How do you think I found this thread? The last post before mine certainly wasn't on the "New" list.
> 
> It was either resurrecting this zombie thread or starting a new one, in which somebody will inevitably respond with a link to this one.
> 
> Well, I did look through all ten pages and it's all a bunch of back and forth whether structure is high risk or not. Nobody actually crunched out some numbers until my post was answered.


Tostig, I just answered your question.


----------



## james4beach

MrMike said:


> That being said, I understand the dividend was frozen during COVID but that's a once in a lifetime event (or 2 or 3 times, like 2008 financial crash). So outside of big events that happen every 10 years, is this a good stock for income? I define good as in they always pay the same dividend every period (i think this is monthly?).


I have forgotten some of the earlier discussion, and I'm not an expert in split corps. You're asking if this is a good income stock. Well to start with, make sure you don't buy the capital shares. The only thing which *might* work out for you is DFN.PR.A the preferred shares. I don't know what the payment history is, so I can't comment on how reliable the payouts are.

If someone asked me how to get a regular, steady income payout that is most likely to last in the long term, I would point instead to Vanguard's *VRIF*. This is a well diversified "balanced fund" which aims to pay out a steady monthly cash distribution, currently $0.0872 per share each month which is a 3.95% yield.

In my opinion, VRIF is fundamentally more sound by design than the split corp approach and I think it will be capable of delivering on its promise to keep steady payouts while also preserving the value of your capital. So the idea would be that if you invested 500K in VRIF, you should get monthly payments of roughly $1645 while seeing your initial 500K preserved over the long term (though, with some inevitable volatility).

Why do I say VRIF is more sound by design:

it holds a well diversified portfolio (more diversified than DFN)
it doesn't use leverage
no financial engineering and no complex corporate tricks (like DFN)
VRIF has an extremely low fee, and Vanguard is honest about this
DFN and other split corps actually take huge fees 'under the hood'
DFN and other split corps have complex fee structures that are hard to decipher
Just based on diversification and low fees alone, I think VRIF is a superior choice.

Some articles on VRIF









The lowdown on Vanguard's Retirement Income ETF: can you rely on its 4% payout target? - MoneySense


While a targeted return is NOT a guarantee, Vanguard expects the product will attract a fair amount of money from income-oriented investors suffering sticker shock when their GICs mature.




www.moneysense.ca













Unpacking VRIF, Vanguard’s New Monthly Income ETF | Canadian Couch Potato


When Vanguard launched its family of one-ETF portfolios back in 2018, Canadians embraced them enthusiastically. And why not? These so-called “asset allocation ETFs” took a good idea—a balanced mutual…



canadiancouchpotato.com













Vanguard’s VRIF: Your New Single Ticket Retirement Income Solution


Two years ago, Vanguard launched a suite of asset allocation ETFs that changed the game for DIY investors in their accumulation years. These balanced ETFs provide low-cost, global diversification, and automatic rebalancing with just one fund. Today, Vanguard announced another evolution in the...




boomerandecho.com


----------



## MrMike

^ excellent response! I'll check them out.

My only worry is that I'm investing with a 3% HELOC so a 4% yield nets me 1% - this is great if I was investing with my own money, and actually, with the dividends I collect, I would put them in VRIF for sure to add more safety to higher risk stocks like DFN (14%), EIT (11%), HHL (9%), TXF (12%)

"More safer" high yielding stocks maybe are: ZWU (7.5%), ZWE(7%) ZWH (6.5%) I'm sure there's more I haven't heard of that are not from BMO. VRIF, oh this is a new stock - Sept 2020 - this is where I would put dividends... unless I need to withdrawal them.

But I'm only considering the above because I already own a reasonable amount of blue-chip stocks for "safety/stress free".


----------



## agent99

MrMike said:


> If the answer to my question is "just google it" then you are not being helpful.


What would you like me to do? Google it for you?👴

There are several informative articles about split corporations on the web, but not necessarily here on CMF. If you or Tostig are internet challenged, I would be happy to look those up for you 😄

Here is the first one that a Google Search brings up (there are many more). Wikipedia - who would have guessed 





Split share corporation - Wikipedia







en.wikipedia.org


----------



## Spudd

MrMike said:


> ^ excellent response! I'll check them out.
> 
> My only worry is that I'm investing with a 3% HELOC so a 4% yield nets me 1% - this is great if I was investing with my own money, and actually, with the dividends I collect, I would put them in VRIF for sure to add more safety to higher risk stocks like DFN (14%), EIT (11%), HHL (9%), TXF (12%)
> 
> "More safer" high yielding stocks maybe are: ZWU (7.5%), ZWE(7%) ZWH (6.5%) I'm sure there's more I haven't heard of that are not from BMO. VRIF, oh this is a new stock - Sept 2020 - this is where I would put dividends... unless I need to withdrawal them.
> 
> But I'm only considering the above because I already own a reasonable amount of blue-chip stocks for "safety/stress free".


I feel like reaching for yield like this when you are doing leveraged investing is a risky idea. Reaching for yield tends to mean purchasing investments that will react more strongly than the overall market during a crash. 

Here's a chart showing the TSX vs DFN during the 2020 covid crash:





PerfCharts | Free Charts | StockCharts.com


Dynamically compare the performance of up to ten different ticker symbols on the same chart to see the relative strength of a group of stocks, ETFs or funds.




stockcharts.com





Leveraged investing also amplifies your returns, so by combining it with riskier investments with high yields, you end up also amplifying your risk. 

It would be more prudent to invest into a broad market index, or blue chip stocks like the banks, pipes, utilities. 

Yield really only matters once you're retired and you need cash flow, and even then, it's debatable.


----------



## MrMike

I just ran some numbers and the reward doesn't seem worth the risk. My math showed if you invested $1K in 2010 and sold in January 2020, you would have made $20 (2%). At least you didn't lose money but the risk doesn't justify a 2% profit.... AND this assumes they paid each month (I didn't check so 2% is best case scenario then).

Granted, a few "gambling stocks" have some place in a portfolio, small % so if you do want DFN, make it a very small slice. The price is slightly lower than pre-covid by 5%. That's not the savings you would have gotten back in March (50% drop). If you bought back then, then it seems more worth it (though if you had money back then, you should have bought other stocks instead haha). And this is the cheapest the stock has been outside a crash.

I mean, people own BlackBerry and when has that made investors money?

..... thinking more.....

Actually, I think I'll skip in stock. The growth (or lack of) isn't worth the dividends. This chart says it all:










At least TXF (12% yield) has a nicer chart


----------



## agent99

Spudd said:


> Yield really only matters once you're retired and you need cash flow, and even then, it's debatable.


I have owned quite a number of split corps over the years. Almost all the preferreds side. Only once the capital side of split. The preferreds mostly paid out the promised dividend and normally never lost any value. (except in 2020) But even if the dividends seemed quite juicy, there was risk involved and no chance of growth. By the way, for those new to splits, what they call preferreds are nothing like the preferreds that regular companies issue. Pays to read the prospectus in detail.

I sold all my splits last Spring, mostly at a smallish loss and replaced with securities that were safer. My concern was that the companies doing the financial engineering would fail. Hasn't happened - yet.


----------



## james4beach

agent99 said:


> I sold all my splits last Spring, mostly at a smallish loss and replaced with securities that were safer. My concern was that the companies doing the financial engineering would fail. Hasn't happened - yet.


They also take massive fees. They really are like hedge funds.


----------



## Tostig

MrMike said:


> I just ran some numbers and the reward doesn't seem worth the risk. My math showed if you invested $1K in 2010 and sold in January 2020, you would have made $20 (2%). At least you didn't lose money but the risk doesn't justify a 2% profit.... AND this assumes they paid each month (I didn't check so 2% is best case scenario then).
> ...


Does that include the $0.1 div/share each month? According to the fund's objectives, it is geared towards investors looking for income. So like investors who hold bonds, they may not be as concerned if the value of their bonds go up and down as long as they get back their principle on maturity. And at the fund's maturity, the investor of split corps get back $10 per share unless, the fund decides to extend the maturity.

I tried to replicate what the fund might be doing that gives investors such high dividends.
Yesterday BMO.TO closed at $126.83. Its dividends is $4.24/sh. That's a yield of 3.34%.

If the fund wants to boost the dividends to $10/sh, it needs to find an extra $5.26 /sh each year.

For 100,000 shares of BMO, that's an extra $48,000 per month needed.

I plugged the numbers into BMO Investorline.
Selling a call option for 1000 contracts, 18June2021, $128 strike price will raise $113,743.05 for this purpose and can be done again each time the option expires. (I'm not an options trader, so I don't know if this is correct.) 

However, if BMO's stock price goes up and the call option is exercised, then the fund will have to dip into the remaining cash for the extra money on top of the money received from the exercise to repurchase BMO for the higher stock price and then sell a new call option.

Is this correct? Is this sustainable? Each month, regardless if the call is exercised or not, you have excess cash accumulating from all those previous call options.

When the markets tank as it did 2008, the fall of 2018 and March 2020, there won't be buyers for those call options. But we have seen that the banks did maintain their dividend payment to the fund. As the fund also says, if the unit NAV (Capital NAV + Preferred NAV) falls below $15, it stops paying out dividends. So in cases like that, the fund continues to collect dividends from their holdings (as long as they maintain them) but keeps them as they continue to try selling calls.

As a few people has previously posted, I also can't see where the risk is higher than another other investment. I hold stocks that go on wild rides too.


----------



## ddivadius

People use Class A versions of split shares to generate a fairly reliable source of high income when high income is needed (ie. retirement or early retirement). GIC and bond income is not so good right now and you can make 8%, 9%, 10%+ using Class A version of split shares. Not all split shares are good. You need to look at their payout history and NAV history to see when and how they reacted in down times (ie. March 2020) to better understand potential risk. I would recommend GDV, RS, ENS and DFN. They are NOT designed for capital appreciation. They do make sense for a retiree as part of a RRSP or LIRA where you can withdraw the yield without touching any capital or limiting any capital withdrawals until the min RRIF WD rates get above 8% (ie. age 85+). Limits stress of market downturns for some folks. I would not go above 25% of a portfolio in splits as they are not risk free (ie. biggest risk is not paying dividend while the NAV is <$15 which can happen if underlying assets drop in price). Here is a good video that explains them in a simple way you may find helpful.


----------



## james4beach

Split corp or not, there is simply no way to reliably generate a cashflow above roughly 5% yield without risking seeing the capital itself decline over the long term. This comes from financial theory and has been very well studied.

So a portfolio (no matter what's in it) generating 3% yield ... yes, that's plausible. 4% too. And 5%, maybe 5.5%, but that's as far as you can stretch it while preserving the original capital amount and not running significant risk of it deteriorating or even collapsing.

If you run into any investment that is "generating" more than 5% yield, there is significant risk to seeing your capital erode over time. It doesn't matter if it's preferred shares, split corps, dividend stocks or anything else.

DFN.PR.A at 5.4% yield is literally at the edge of what's possible, but as an engineer, I don't like dancing at the edge of stability. That's why if I was recommending one of these to someone, I'd suggest VRIF which aims for a more attainable 4% payout level, *with very low fees*.

*~ My own approach to all this ~*

I'm semi retired. Well, self employed with some income, but there are times where I have no income. So I do sometimes live off my capital and the way I do this is by investing in a well diversified "balanced fund" kind of portfolio with very low fees. Then I sell off or liquidate up to 3% or 4% to extract cash from the portfolio. If I was fully retired, I could do the same thing and live off my portfolio by extracting a 3% to 4% cashflow by selling securities each year.


----------



## agent99

If you want to risk losing your shirt, buy split Class A shares. And don't expect to get your capital back even on the preferred side. There is no maturity of the type that bonds have.

You can, and I have, used split preferreds in the past to boost cash flow. But not much of an allocation. I would not recommend them to retirees who are even slightly risk averse.


----------



## Tostig

ddivadius said:


> People use Class A versions of split shares to generate a fairly reliable source of high income when high income is needed (ie. retirement or early retirement). GIC and bond income is not so good right now and you can make 8%, 9%, 10%+ using Class A version of split shares. Not all split shares are good. You need to look at their payout history and NAV history to see when and how they reacted in down times (ie. March 2020) to better understand potential risk. I would recommend GDV, RS, ENS and DFN. They are NOT designed for capital appreciation. They do make sense for a retiree as part of a RRSP or LIRA where you can withdraw the yield without touching any capital or limiting any capital withdrawals until the min RRIF WD rates get above 8% (ie. age 85+). Limits stress of market downturns for some folks. I would not go above 25% of a portfolio in splits as they are not risk free (ie. biggest risk is not paying dividend while the NAV is <$15 which can happen if underlying assets drop in price). Here is a good video that explains them in a simple way you may find helpful.


Thanks for posting that video. I have watched it before before posting but after having just watched it again, it reminded me of something that I had forgotten: the leverage.

So in a nutshell, this is how the split corp Class A funds make their dividends:
1) normal dividends from its base holdings;
2) extra dividends from Preferred split class - sounds like theft to me. Who wants to invest in the Preferred Class when you know some of the dividends it earns go to fund investors of some other fund?
3) Covered Calls - ok. I simulated the math and it seems to work.
4) Leverage - isn't buying on margin and borrowed money the stuff of stories of suicide jumpers during the 1929 crash and of other famous movies and myths? On the one hand, these funds are managed by professionals within their risk tolerance. On the other hand, aren't these the same class of people who invested in vehicles that caused the 2008 financial crisis? And then, if one looks at the historical record, DFN and LBS they did survive 2008, 2016, 2018 and 2020 missing only a handful of dividend payments. Leverage is also the reason why a lot of analysts suggest NOT to invest in TQQQ if you're not an advanced investor who is willing to take on that kind of risk.

I also ran across a Q&A with Patrick McKeough who, in the end of the conversation recommended NOT to invest in split corp mutual funds because of all their hidden fees. But I don't buy that. Those hidden fees would be buried in the fund's high MER and if the investor had done his homework, he would see what kind of activity the fund would going through that would generate all those fees (and dividends).


----------



## agent99

That's not how capital shares work. Keep studying.


----------



## dubmac

LBS is another split share product that some brokers push on retirees etc as a source of income.
this one is a little different from DFN, seems to stay range bound between $11-9, with the exception that it doesn't pay distributions when SP drops below 5 threshold....leaving the retiree to eat cat food presumably when they most need the income!


----------



## james4beach

dubmac said:


> LBS is another split share product that some *brokers push on retirees etc as a source of income*.


That's a very interesting chart! It's sad how unreliable that payout is.

One reason income-oriented products bother me is that they are marketed in a way that deceives seniors and retirees. The earliest ones I encountered were the 'Monthly Income' funds, like BMO's which used to pay over 9% yield back in 2011. In the years following that, BMO cut the distributions by 60% and then I think they cut them further.

So the brokers and salespeople talk the senior into buying this, they start living off that 9% yield and then ... the distributions are slashed.

Time and again, retirees are talked into these things and led to believe that they offer consistent payouts they can count on. But anything that starts at over 5% yield already has its days numbered, and it's just a matter of time before the distribution is cut. Or the share price keeps declining as they keep paying you back with your own capital.

Then they came out with these 'covered call' ETFs, again to boost yields artificially. Look at the ZWU share price. It's been steadily declining ever since it was created... because it's not sustainable either.

I don't like seeing fund companies and brokers deliberately misleading seniors, but they constantly do this. The investing public has a very poor understanding of investment yields and dividends, and the industry *exploits this misunderstanding*.


----------



## MrMike

james4beach said:


> Then they came out with these 'covered call' ETFs, again to boost yields artificially. Look at the ZWU share price. It's been steadily declining ever since it was created... because it's not sustainable either.


NOOO, not my ZW_ stocks! I have ZWK and ZWC. ZWK's chart looks good but it's too new for that to matter. ZWC has been going down.

TXF (12% yield) charts are going up; what do you think of this one?

What would you suggest for high yielding stocks or funds? You mentioned VRIF as one. Some ideas are: TQCD, TPRF, ZRE, ZEO, HDV


----------



## Spudd

MrMike said:


> NOOO, not my ZW_ stocks! I have ZWK and ZWC. ZWK's chart looks good but it's too new for that to matter. ZWC has been going down.
> 
> TXF (12% yield) charts are going up; what do you think of this one?
> 
> What would you suggest for high yielding stocks or funds? You mentioned VRIF as one. Some ideas are: TQCD, TPRF, ZRE, ZEO, HDV


As I mentioned before, but I'll mention again, because it didn't seem to sink in -- yield is not what you should be looking for at this point in your investing journey. You have borrowed money to invest, so you are already taking more risk than average. Invest in a broad-based index fund that is not dividend-focused, as a less risky proposition. Total return will likely be similar but volatility should be lower.


----------



## james4beach

MrMike said:


> What would you suggest for high yielding stocks or funds?


Like Spudd says, I don't know why you are aiming for yield. These things are for retired people who want to live off of their investments.

The main thing to understand is that the yields (dividends or distributions) are not free money. Once they exceed the sustainable level, they always come at a cost.


----------



## MrMike

james4beach said:


> Like Spudd says, I don't know why you are aiming for yield. These things are for retired people who want to live off of their investments.
> 
> The main thing to understand is that the yields (dividends or distributions) are not free money. Once they exceed the sustainable level, they always come at a cost.


I'm focusing more on growth in my TFSA right now so it's not like I have nothing on that level.

For this taxable account, just to start it off (I only have a TFSA right now), I am looking for higher yield (retirement income) so that I can take out $200 here or there if needed. But when I don't take out money, then I can reinvest the dividends into other ETFs like:

VGRO (iShares Core S&P US Total Market Index ETF) or
TGGR (TD Active Global Equity Growth ETF) or
ZIN (BMO Equal Weight Industrials Index ETF)
I know it's not what you would do but also, it's not a "bad" plan - right? It's just what I'm choosing to do at this point. I am listening  and I decided to drop funds like DFN but keep some like TXF, ZWE mixed in with safer bets like TRP (TC Energy) and CU (Canadian Utilities)


----------



## james4beach

MrMike said:


> For this taxable account, just to start it off (I only have a TFSA right now), I am looking for higher yield (retirement income) so that I can take out $200 here or there if needed. But when I don't take out money, then I can reinvest the dividends into other ETFs like


I'm having trouble understanding or following this plan. Maybe there's something you are after, that I'm not understanding. It kind of sounds like you want to build a long term investment, but also have the _option_ of taking cash out of it as you need - right?

Is there something this plan achieves, that you can't get through a much simpler approach such as just holding a *single* balanced fund such as XBAL or VCNS (depending on your risk tolerance), and then simply "take out $200 here or there if needed" by selling units, whenever you want?

Maybe there is something to be gained by involving complex split corp shares plus 3 more ETFs... but I haven't understood it.

If trading fees are the issue, then you can do this by holding a mutual fund instead, since there's no cost to sell shares. There are a number of excellent balanced fund MFs, too such as Mawer Balanced and PH&N Balanced. These would make very solid long term investments, but you can also extract cash from them whenever you want by selling some shares.


----------



## MrMike

james4beach said:


> I'm having trouble understanding or following this plan. Maybe there's something you are after, that I'm not understanding. It kind of sounds like you want to build a long term investment, but also have the _option_ of taking cash out of it as you need - right?


Thank you for your patience  No, long term investing is in our TFSA for now .... or rather, I'm building it up.... i'm working on building up the allocation in nicer, growth stocks  

This taxable account, for now anyways, is to generate income. My wife, who is not into investing, supported me through building both our TFSA (through our own savings + HELOC). But she is getting bored with all my investing talk since the pay off if far in the future. I'm hoping by starting this cash account to be more income focused, she can take out some money here and there (which we *do not* do in our TFSA). I'm hoping that will get her more interested in saving/investing. So it will start out as an income, retirement-like account and most months, I'll reinvest the dividends (into more reasonable stocks like VRIF) but once in a while, she can have some spending money.

That's what I'm thinking.... is that weird? I know its not the way to get the maximum value from investing but we will (hopefully haha) make money still.


----------

