[Vicjai]

Hi everyone,

I just want to know what everyone's thoughts are in these high income dividend stocks: EIT (CanoeEIT Income Fund) that's currently at a 10.73% yield, and FFN (North American Financial 15Split) that's currently at a whopping 17.39% yield.

With the recent downturn of the TSX, it has created unusually high yields for these stocks. Now given that EIT holds a huge portfolio of diversified NA bluechips and FFN which holds 15 of the largest NA banking institutions, their long history without missing any distributions to shareholders since their inception, would it be an attractive time to buy with the recent market hammering we experienced to take advantage of the yield? Or do you think the high yield is unsustainable? Thoughts?

By the way, I also want to thank you guys who've read/purchased the book I authored - Wall Street Kitchen: The Recipe Behind a Housewife's 1000% Stock Return. It means so much and I hope it awakens the rockstar investor inside you. After almost 2 full years of it being published, I cannot thank you guys enough for the support as it continues to receive praise from my local community and abroad!

Love to know your thoughts, and happy investing!

 

[agent99]

Those funds do have high distributions. But those distributions are way higher than the dividend income of the underlying stocks. In good times, they include capital gains on the stocks held. They also include Return Of Capital (ROC). This is is mostly just your own money being returned to you. In 2017, almost 1/2 the distribution for EIT was ROC.

http://www.canoefinancial.com/eit-income-fund/tax-information/

I haven't looked at FFN, but assume it is similar.

There is a place for this kind of fund. It's a bit like investing your money in a portfolio of good companies, (or an etf that holds those companies) that have a total return of, say 5%. Then sell off enough each year to provide 10% "yield". Obviously, as time goes by your investment will go down in overall value. This suits some who are in retirement. But don't get sucked in by the apparent high yield.

 

[RBull]

^Good assessment.

 

[Vicjai]

Good insight agent99.

May I ask Are there any good yield companies you have or recommend on that merit?

 

[AltaRed]

Don't understand what you mean by 'good yield companies' on that merit.... Are you referring to individual companies, or funds?

In the case of companies, what one needs to look at is dividend payout ratio on a company to company basis to see if it is sustainable. In most cases, dividend payout ratio should be under 50% of earnings, but it should be less than 50% of free cash flow. Some types of businesses like REITs will have higher payouts (as a percentage of AFFO) and some financial companies as well. If dividend payouts are greater than cash flow, it means they are borrowing money (debt) to pay the dividend.

As regards funds, Agent99 already said... distribution payouts cannot exceed underlying cash flow without having to sell underlying assets (return of capital) to help fund the distributions. Many managed payout mutual funds fall into this same category like these ETFs.

 

[agent99]

Good insight agent99.

May I ask Are there any good yield companies you have or recommend on that merit?

A lot depends on your investment horizon. Someone just starting out would likely choose different investment than someone near or in retirement. And don't just look at the yields. They can be, as pointed out above, quite misleading, especially in the case of funds.

One thing I have found over the years, is that when our major banks have dividend yields approaching 5%, it means they are perhaps undervalued and may be a good buy. Right now, BNS and CM are in that territory indicating the market does not like them as much as say RY, BMO or TD. Usually they play catchup. The banks have had Total Returns (capital gain with dividends re-invested) in the mid teens. Hard to do better than that.

 

[Numbersman61]

An important factor when considering EIT is the net asset value of the units in the trust. In the past, there has been a significant discount in the market price compared to net asset value. Today the market price is similar to the net asset value. I’d be concerned if the market price was significantly higher than net asset value. Some of the distributions that are labeled as return of capital (ROC) are actually returns based on unrealized capital gains in the portfolio so it is not actually always a return of your own investment. Approximately 35% of the portfoliois are US blue chip stocks. The fund has been hurt with the recent significant decline in the market value of energy stocks.

 

[SixesAndSevens]

i had looked at the Canoe funds about a year ago...it is one hot mess of financial engineering.
covered call writing, credit call/put spreads, leveraged risk parity...it is basically a hedge fund.
among its board is Kevin O'Leary...a financial scamster and con artist...

i decided to pass and continue investing on my own.

as for those split shares, you have to read the prospectus and understand which class and tier you are buying.
the yield is not free...

...basically that is the bottom line...yield is never free.
you give up something else..and/or take on some other non linear risk...you may/may not realize what risk you are signing up for.

bottom line...if you find any high yield security and you cannot clearly identify the trade-off/risk that comes with that yield, then you are missing it and should not be buying it.

 

[Numbersman61]

i had looked at the Canoe funds about a year ago...it is one hot mess of financial engineering.
covered call writing, credit call/put spreads, leveraged risk parity...it is basically a hedge fund.
among its board is Kevin O'Leary...a financial scamster and con artist...

i decided to pass and continue investing on my own.

as for those split shares, you have to read the prospectus and understand which class and tier you are buying.
the yield is not free...

...basically that is the bottom line...yield is never free.
you give up something else..and/or take on some other non linear risk...you may/may not realize what risk you are signing up for.

bottom line...if you find any high yield security and you cannot clearly identify the trade-off/risk that comes with that yield, then you are missing it and should not be buying it.

Kevin O’Leary became involved with Canoe when they purchased his package of funds which had been a financial disaster. It is my understanding that he no longer has any involvement with Canoe.

 

[My Own Advisor]

I wouldn't own those for the reasons above....modest let alone high RoC.

Ideally you want low payout ratio, under 60%, + growing earnings over time for any company. More earnings, more potential cash flow, more potential for dividend increases. Rinse and repeat.

 

[OnlyMyOpinion]

Brett Wilson is chairman of Canoe. He has a better track record. Still not my cup of tea, too many good diy index funds out there. Kevin is not involved afaik.

 

[Vicjai]

@agent99 Great common sense view with a nice balance of yield and dependability.

 

[Vicjai]

Don't understand what you mean by 'good yield companies' on that merit.... Are you referring to individual companies, or funds?

In the case of companies, what one needs to look at is dividend payout ratio on a company to company basis to see if it is sustainable. In most cases, dividend payout ratio should be under 50% of earnings, but it should be less than 50% of free cash flow. Some types of businesses like REITs will have higher payouts (as a percentage of AFFO) and some financial companies as well. If dividend payouts are greater than cash flow, it means they are borrowing money (debt) to pay the dividend.

As regards funds, Agent99 already said... distribution payouts cannot exceed underlying cash flow without having to sell underlying assets (return of capital) to help fund the distributions. Many managed payout mutual funds fall into this same category like these ETFs.

AltaRed I do agree with you that payout ratio should be less than 50% for a stock to be regarded as safe. However, many banks and financials' payout ratios do go over 50% but less than 60% which I think are completely acceptable. In terms of the funds in question, yes, the yield is quite attractive which is why I want fine people like yourself to share your thoughts and concerns! Thanks

 

[james4beach]

Vicjai, investments should not be bought for yield alone. EIT is a pretty complicated looking fund that's doing more than just holding a bunch of high quality stocks. It's also a closed end fund (CEF) which brings additional complications, and can trade above or below its fair value.

It's possible to invest in stocks with a tilt towards higher dividend yields. However it's important to realize that yield doesn't "come for free". Things that have a high yield will not make a person rich; they just pay out more cash per year, at the detriment of growth in share price. From the perspective of total wealth gain (total return), you end up in more or less the same place.

In fact, seeking high yields can lead to bad decisions and flaky investments which actually hurt the overall performance. This is one of the dangers of yield-focused investing.

You might want to take a look at the iShares CDZ fund which is a pretty normal equity ETF. It doesn't do anything strange, and holds good quality securities across many sectors, but it has a higher dividend yield at 4.3%

 

[AltaRed]

XDVIV is another high(er) yielding ETF at about 4.5%, although maybe not as good as CDZ (dividend aristocrats). The point being is any yields above about 5% on a sustained basis (ignoring short term effects in market corrections) is really pushing it on an income stock. Few companies can sustain yields above that and continue to grow both their business and their dividend over time.

 

[Numbersman61]

Regardless of the comments by some posters, I remain an investor in EIT. I did reduce my investment by 50% a year ago due to its exposure to the energy industry. It’s not that complicated - a closed end investment trust that includes leveraging as part of its strategy. In hindsight, I should have sold more, especially when the NAV dropped below market price. I also own CDZ.

 

[agent99]

XDVIV is another high(er) yielding ETF at about 4.5%, although maybe not as good as CDZ (dividend aristocrats). The point being is any yields above about 5% on a sustained basis (ignoring short term effects in market corrections) is really pushing it on an income stock. Few companies can sustain yields above that and continue to grow both their business and their dividend over time.

Don't disagree with that really. However, as interest rates rise, large investors move money to fixed income. Share prices go down. Even if dividends stay the same, the dividend yields increase. So basically just pointing out that that 5% is just a percentage. It depends on the state of the markets. Don't know whether 5% represents the sweet spot or not.

We do have a good part of our equity in solid stocks (like the banks) that have dividend yield below 5%. But how about some of the others that a retiree like myself owns to boost cash flow? We do have some bonds, pfds and split pfds yielding over 5% . But also have these in our portfolio:

BCE 5.42%, EIF 7.03%, RUS 6.11%, TRP 5.1%, VET 8.22%, PWF 6.11%, POW 5.67%, CU 5.0%, REI.UN 5.81% among TSX holding plus these US based foreign ADRs: RDS 5.92%, RIO 6.08%, BT 5.92%

Mostly quite solid companies. Not all have had growth and therefore Total Return like the banks, but do contribute to cash flow of overall portfolio. Bear in mind, that we also have a solid core of stocks with dividends below 5% as well as some with no dividends!

 

[AltaRed]

I have a few of those* as well, but consider several of my higher yield ones 'mature' stocks not going anywhere fast. At least one of them, e.g. PWF, is on the block as my most likely next exit. Some of those 'higher yielding' ones are struggling to make headway and are higher yield for that reason.

More importantly I think is where one is at in their investing journey. Like you, I am retired and more interested in income than growth. But not at the risk of yield payouts approaching 100% of earnings (or free cash flow). Those in their 30s and 40s probably should be more interested in growth companies with higher Total Return, i.e. mid to high teens ROE and ROCE metrics, with less of the total return in income (yield).

* BCE, TRP, PWF REI.UN, 4 prefs

 

[agent99]

I have a few of those* as well, but consider several of my higher yield ones 'mature' stocks not going anywhere fast. At least one of them, e.g. PWF, is on the block as my most likely next exit.

PWF and POW have not been stellar performers for me. Owned them for 14 years for Total Returns only in 5% range. Over longer term TR is about 10%. I think of them as been bond-like. They churn out income but value does not grow. Maybe I should look at something with more growth potential? But what? More banks???

 

[AltaRed]

PWF and POW have not been stellar performers for me. Owned them for 14 years for Total Returns only in 5% range. Over longer term TR is about 10%. I think of them as been bond-like. They churn out income but value does not grow. Maybe I should look at something with more growth potential? But what? More banks???

Don't know and that decision is highly individual specific. I just don't like TR in the mid single digit range* long time, with most/all of it in dividend yield. I much prefer long term TR in the 8-15% range with a good portion of it being price appreciation, the latter because cap gains is more tax efficient for me. Obviously, not that easy to have a diverse portfolio with long term "balanced" total returns. I already have 4 banks. More would not be 'responsible' options.

* For PWF, Morningstar shows trailing total return of just 5% over both 10 and 15 years, basically all of it in dividend yield. Which reinforces your comment about being bond-like (or preferred share like). That is not acceptable (to me) for common equity.