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Discussion Starter #1
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.
 

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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/
 

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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
 

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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
 

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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
 

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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.
 

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Discussion Starter #7
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%.

(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.
 

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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?
 

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... 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
 

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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.
 

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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.
 

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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.
 

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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.
 

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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
 

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^^^^

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
 

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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.
 

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^^^^^
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.
 

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Discussion Starter #19
- 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.
 
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