Larry Berman CFA, CMT, CTA Dividend Growth Split Corp DGS-T BUY Apr 12, 2021

A vehicle where they split out appreciating assets from the dividend. They pay the dividend stream of income to another holder, and you get a leveraged play on the dividend stocks without the dividend. Not a very good idea to own one of these in a down market. When you think markets are going to go the other way, it is not a bad way to get capital appreciation.

Split Corps. When he sees yields of 13-14% and predicated on covered calls and preferreds, he does not see consistent 13-14% yields in the stocks. He is leery of the yield.

Effectively a creation of a preferred share and a capital share. If the stock performed quite well, you are getting a leveraged investment effectively on the preferred share. EG, on a $60 stock, you could have a $30 preferred share and a $30 capital share. If the capital share goes from $60 to $66, you have now gone from $30 to $36 giving you a 10% improvement in terms of return. What people don’t realize is a) the leverage, but b) preferred shares in the structure have to be paid out first. Consequently, the way these are structured is that the dividend coming from the underlying portfolio, simply pays the dividend to the preferred share. If they are paying a dividend on the capital side, that is typically coming from expected price appreciation or option writing. If you are a higher risk investor, it is something you could consider.

He won't touch it. You have to ask yourself why is it paying a yield that's more than the component parts? This one uses some kind of structured finance. Lots of leverage involved. Doesn't trust it. The yield looks wonderful, but he doesn't care.

Very concentrated stock portfolio, leverage of 2:1. Pays out a lot in income. A bit of smoke and mirrors here, but not in a nefarious way. Twice as volatile in general as underlying markets. When things are good, they're really really good. And when things are bad, they're really really bad.

If you're OK with leverage, and you think markets are going to go higher, you'll probably have a good experience. Last 2-3 months, with all the downside market risk, have not been pleasurable.
 
The misleading part is to look just at the dividend, and say that's a great dividend. Don't be fooled; it's the leverage talking to you. There's also a risk with the preferred shares of absolutely losing your money. For sophisticated investors only.