Opinions Richard Croft
Financial 15 Split CorpFTN.TOBUYDec 19, 2013
Stock price when the opinion was issued
As of Jun 09, 2026. Market Open.
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Leverage allows them to provide such a large dividend. Typically 2:1 leverage, so you get double the bang for the buck. Lots of volatility, big ups and big downs. When markets are working, work great. Up to the board of the fund as to what distribution they pay out.
Over 20 years, you'd have done better just holding a basket of US or Canadian banks, such as XLF or ZEB.
He is not an expert on this holding. It has a strong yield (around 10%) that attracts many investors. During the 2016 market meltdown, it fell by about 50%. So he feels there must be leverage in this product. He suggests looking into the prospectus to better understand the leverage.
Is the high-yield sustainable?As he understands it, this is a corporate finance, where they will take the common and preferred shares, and lever up the common 2 for 1 in terms of growth, and the preferred shares just get the yield. A very concentrated play on the direction of the underlying basket of common. If you believe those 15 stocks are something to be owning right now, you are going to get some good capital appreciation and the yield is safe. If you go into a bear market with the 15 stocks, your yield is not at all safe. This is not without risk.
As he understands how these split corps work, one gets the dividend and one gets the growth. It depends on what you want out of life. If you want street yield, these manufactured products might be right for you. He doesn’t buy them because he doesn’t like his clients to be paying 2 layers of fees. He isn’t against the product. Dividend yield of 14%.
It is a company invented by bankers. They take a collection of companies and package up the stocks and sell out preferred shares and capital shares. They sell call options to enhance the yield. They have to maintain a certain net asset value. The preferred shareholders are protected. You may suddenly get no yield some quarters. The fees and the risk are also high, as well as the yield.
Not a fan of split shares and doesn’t think they are an adequate substitute for GICs or bonds. Their make up is a little convoluted in that there is a Capital Share and a Preferred Share. Effectively all the dividends that come out of the Capital Share get thrown into the Preferred Share. If all those companies don’t do very well, the dividends get cut and the preferred share dividend is susceptible to getting cut as well.
This separates the preferred shares from the capital. The dividend is pretty safe, because they are stripping it away from the capital, and it is the banks. The real risk is if you are Long the capital portion, what if you don’t get capital appreciation quickly. These deals last for about 5 years. If you don’t have capital appreciation, and you have embedded fees, the leverage investment on the capital financials won’t work out that well. That is the real risk. Feels the banks are pretty good place to be with interest rates likely to go higher in the next 5 years.
Believes that they issue preferred shares, and then common shares alongside. Then they take the preferred share capital and double up on the dividend yield. If that is correct, then he personally believes it is probably okay, but he would rather go with just picking your own bank. If you want more of a yield you can use more leverage to do that, and thinks you are going to be better off longer-term.
14.5% yield. Look back further than a couple of years. The averaged yield has been 3%. In the ’08 crisis they went from about $18 to about $2. He believes they are paying out capital gains in their underlying companies. In the last few years there was no crisis so there was little risk.
These are 15 banks, both Canadian and US and an interesting way to play the financial sector, purely from the banking side. They have taken 15 banks and split out the capital gains and growth of the dividends as one share class, the Capital Share. They have taken the dividends alone into the Preferred Share calling it the Preferred Class. What is interesting is that the US banks are not paying very rich dividends now, mainly because they have to get approval from a number of different regulators. There is an expectation that there may be more of this next year. Most of the dividends on the preferred shares are coming from the Canadian banks of about 3%-4%. In effect, they are lowering the cost of the stocks so that fixed dividend on a lower cost base gives you a higher yield on a preferred share of about 5.2%. Anything that grows beyond that accrues to the capital share. Canadian stocks have been raising dividends, hence the higher yield and there is a potential that US banks could start paying some interesting dividends next year.