Financial 15 Split Corp (FTN.TO)

These “split share” structures are not his favourite. Offer high yields, but they split into common and preferred shares and everything is done to protect the preferred shares. If NAV declines to a certain point, the common share completely stops. The yield is great until something goes wrong. You are paying a management fee to hold a group of 15 stocks. If you are dealing with a discount broker, you can buy your own 15 stocks very, very cheaply and never pay a management fee again.

These engineered instruments are not his favourite things. They carry an embedded management fee which takes away from the eventual return to the shareholder. By buying all 6 banks and the 5 biggest banks in the US and insurance companies, it basically does pretty much the same as an exchange traded fund would do, but with a higher expense. You have to understand that the 14.7% dividend is not a dividend as you would normally understand, but is a distribution and is made up by a number of components. There is also a little bit of income from selling Covered Calls.

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.