Recently, split-shares have been a big topic. The yield is excessively attractive for many but what’s the downside? What’s the risk you take with split-share corps?
What Are Split-Shares Funds?
Split-shares funds are a special type of investments where a Class A share and a Preferred Share are put in place trading separately under a specific investment strategy against a specific stock, or group of stocks, such as the banks, the utilities, or the pipelines.
The Class A share is often called the capital share and provides a higher distribution (not a dividend as wrongly advertised). It does so by using leverage and covered calls which is where the risk comes in. More on this later.
On the flip side, the preferred shares opperates similarly to preferred shares in the fixed income space.
Distribution within a split-share fund will happen first with the preferred shares followed by the capital shares but capital shares will only have a distribution if the Unit NAV (Net Asset Value) is over a certain threshold.
The Unit NAV is the combination of the NAV for the preferred shares and the capital shares. If the Unit NAV is below the threshold, no disttibution is made.
The risk of not being paid a distribution is then based on the stock market performance. Since leverage and covered calls are performance magnifier, if the market does well, you do well but if it doesn’t, you could be faced with a lower NAV and therefore not receive a distribution.
These funds are often called split-share corporations, or split-share funds. They also have an end date, but historically speaking it has generally been renewed for most of the offerings.
Quadravest and Brompton are some of the asset management firms offering many split-share corps.
Putting Split-Shares Corp Into Context
Let’s look at all the investment options out there to see where split-share corporations fit in the investing world.
Here is a table outlining the type of investments generally available to investors. I am excluding fiat and crypto currencies as well as interest and GICs to keep the table simple.
The intention is to show relative risk as you choose to invest based on what it holds. The first row represent the standard investments we know which represent how companies access funds in general.
A stock, or an IPO, is a way for a company to access funds to grow and then it flows on the secondary market. Same deal with bonds by the way.
|Standard Investments||Bonds||Preffered Shares||Stocks||Income Trusts|
|Pooled Funds||Mutual Funds, Exchange-Traded Funds|
|Closed End Funds|
Options are additional trading strategy leveraging the underlying securities with the intention to magnify profits, but it can also magnify your losses.
Anything that uses options is then applying a magnifier but usually on the income and not on the value of the stocks as it has no effect on the stock price of the underlying assets.
Split-shares have to pay the dividend on the preferred shares and the distribution on the capital shares. Even if the underlying assets generate dividends, the preferred shares will be first in line and the distribution on the capital shares come from options, not dividends.
Characteristics Of Split-Shares
Here is your cheat sheet for split-shares.
- Split-share funds are designed to provide income. It’s not about stock appreciation so if you plan to compare BAM with a split-share, you aren’t comparing apples to apples.
- Split-shares pay a distribution and not simply a dividend. It’s like a REIT and you need to understand where to hold it for tax efficiency. Each split-share fund should be able to describe the type of distribution it has.
- Distribution can be missed during poor market conditions due to the minimum Unit NAV expected. If you need the income month to month, during the hardest time, you won’t get paid. Many skipped their distribution in 2008, 2020, and 2022.
- Not indexed to inflation. Most distributions are flat month-to-month and year-to-year. You lose purchasing power and in retirement you can’t count on DRIP to coumpound the growth.
If you DRIP, you can actually compound pretty fast. Here is what 10% return compounded can do. You need to understand your appetite for risks as you can get an annual rate of return of 11%-13% with the banks over a 10-year period.
Polarizing Views on Split-Shares
A few readers over the past few months have brought up split-share funds as a topic. It’s enticing since they provide a high income. Often over 10% which is impossible to get with normal stocks.
Interestingly enough, Mike from Dividend Stocks Rock shared his opinion in a recent newsletter and he is not a fan. Mike is personally focused on total returns through dividend growth stock selection.
After a quick Google search, Pat McKeough from TSI is also not a fan and is not recommending the Class A shares (or capital shares) to his clients.
On the flip side, a YouTuber focused on passive income for FIRE (Financial Independence Retire Early) is very bullish on those. In fact, he is very bullish on everything covered calls. Be careful, the reported yield is based on yield on cost which is a flawed metric.
I would not build a portfolio strategy on split-shares. I would in fact, ensure everything I need is covered outside of split-shares and then see if I could allocate 2% or so to a split-share corp as an income multiplier.
I currently hold non-paying dividend stocks to get higher return and I could flip them to hold split-shares when I need the income for example. I would also only do this once I live from the income my portfolio generates, never during the accumulation years.
I currently favor the simpler strategy of Covered Call ETFs. Lower yield but simpler and less risky overall.
What’s your view?
How You Can Buy Split-Shares
Investors seeking to add split-shares to their portfolio will need to be setup to buy stocks on the stock market.
While they are unique in how they operate from a corporation perspective, the shares are traded like any other stocks in Canada. Choosing the right trading platform can help you keep your cost low, choose your discount broker wisely.
List Of Canadian Split-Shares
Here is the list of Canadian split-shares. I won’t be outlining the NAV or yield here as it’s complicated. The yield drops to zero if the conditions aren’t met and it’s based on the Unit NAV which is not widely available outside the company’s prospectus on the split-share funds.
|Brompton||Brompton Split Banc Corp.||SBC|
|Brompton||Life & Banc Split Corp.||LBS|
|Brompton||Brompton Lifeco Split Corps.||LCS|
|Brompton||Global Dividend Growth Split Corp.||GDV|
|Brompton||Dividend Growth Split Corp.||DGS|
|Brompton||Sustainable Power & Infrastructure Split Corp.||PWI|
|Brompton||Brompton Oil Split Corp.||OSP|
|Quadravest||North American Financial 15 Split Corp.||FFN|
|Quadravest||US Financial 15 Split Corp.||FTU|
|Quadravest||Dividend 15 Split Corp.||DFN|
|Quadravest||Dividend 15 Split Corp. II||DF|
|Quadravest||Dividend Select 15||DS|
|Quadravest||Canadian Life Companies Split Corp.||LFE|
|Quadravest||Canadian Bank Corp.||BK|
|Quadravest||Prime Dividend Corp.||PDV|
|Quadravest||Commerce Split Corp.||YCM|
|Quadravest||TDb Split Corp.||XTD|
|Middlefield Funds||E Split Corp.||ENS|
|Middlefield Funds||Real Estate Split Corp.||RS|
|Mulvihill||Premium Income Corporation||PIC.A|
|Mulvihill||S Split Corp.||SBN|
|Mulvihill||World Financial Split Corp.||WFS|
|Mulvihill||Top 10 Split Trust||TXT.UN|
|Harvest||Big Pharma Split Corp.||PRM|
20 thoughts on “Should You Invest In Split-Shares?”
I can see using Split shares as a “sleeve” to increase yield in a portfolio …but no more than 8-10% of portfolio value . Buying split shares is timing too . The best time to buy them is in a market correction . Buying them at top of a market can hurt in the long run . My test is always ” how did they do in 2008 and March of 2000 ? ” Happy investing crew !
Thanks James. Indeed and one would have to be patient between 2008 and 2020 …
Are you buying them these days? I saw half of Brompton split-shares are not paying distribution next month.
I’m a fan of ENS, I like the steady income, and with the DRIP I can compound monthly. Using portfolio visualizer over 2, 3, and 4 year periods ENS has out-performed. They are one of the rare-split funds in that they only hold ENB. They are also rare in that they have increased the distribution since inception (only once, but it’s possible they will again).
I own some ENB too for balance on growth / income.
I agree with everything else – these are not really for accumulation years but they can juice your income in retirement. I do worry about not keeping pace with inflation but I’m also in the “go-go, slow-go, no-go” camp, so I’m okay with working things such that they don’t necessarily keep a 1:1 pace with inflation.
Thanks James for taking the time to share your approach.
Which account do you hold it in?
I hold preferred units of LFE and DF for bond like portfolio ballast. They have done the job as intended, being down less than half what bond funds are showing lately and returning 3 or 4 times as much income as short term bonds or my HISA.
Thanks for the comment Rich.
Indeed the preferred shares appear to be stable. My parents have held the DF preferred shares for a long time now.
I owned a number of split corps over the years. I learned to just buy the preferreds. The capital shares may look attractive at times, but can be risky. For example PIC.A that was $20 in 1998 went down to close to $2.00 in 2008. Long term Total Return dismal. PIC.PR.A on the other hand maintained a price of about $15 long term (except for the Covid dip), paid a dividend and had reasonable Total Return.
The only splits I presently own, are the Partners Value (BAM) split preferreds that have a fixed maturity date. More like bonds.
Some judge the splits by their holdings. How could holding all 5 banks be risky? But really, we should be more concerned about the companies that run the split corporations. Is there risk there?
Thanks Graham for sharing your experience.
Passive Income Investing has posted more comprehensive videos on Split Funds. Would you update the link to Passive Income Investing on Youtube to this one?
Thanks Erica for sharing an update.
I actually like the original one a lot with respect to the explanation it does. You have both now :)
Awesome! Thanks 😊
I have been burned, but learned my lesson, a couple of times with split shares. I started buying and selling to buy others without looking at the distribution history and price charts. Now I know to stick with the common shares that either almost always pay out, or if they do drop below the NAV line, they rebound quickly. My two favourites are DFN and SBC. GDV is new, but I also have that for some global “diversification”.
So you got burned but your are still at it :)
Care to share why you did not move away completely and how it fits into your overall portfolio?
Sure. I started with FTN after looking into split shares. I can’t say that I understood them, but if they were paying out that kind of money, I wouldn’t mind some of it coming my way. I blame my lack of knowledge and investigation for the bad move to another poorly paying split share. Since then, I take the beneficial history of the global economic crisis and the pandemic to check on a fund’s strength and distribution history through tough times.
I remain wary of the split shares’ volatility (and other higher paying ETFs like ZWU keep me from buying the preferred part of the split share) but I enjoy the high distributions in my TFSAs and RRSPs for my wife and I. They now provide about a third of my dividends/distributions. But when I retire, I plan to move most of my money out of the split shares to more stable stocks and ETFs.
Thanks for sharing your experience Kyle.
I looks like you are investing in Split Shares during the accumulation for growth. That’s an interesting approach.
Is that because you can “see” and calculate the compound growth? As opposed to invest in a dividend growth stocks like CNR or ATD.
Yes, I would have preferred to start investing like you, TAWCAN and other DIYers did with dividend growth stocks, but I was a little “late to the game” when I started the DIY journey in 2014 at the age of 46. We had tried investing the Canadian way in the late 90’s with bank mutual funds (burned then by the dot-com bubble bursting) and continued to sink in a monthly amount (a la the Wealthy Barber) until 2008. That failed miserably (the bank even gave us a letter of apology). After sitting on the sidelines watching the stock market recover after 2009, and letting our small savings grow in an insurance growth fund we moved to, I educated myself in DIY investing (MoneySense had a good article on successful Canadian DIY investors) and spoke to others who were fairly successful. I started small with a TD TFSA and was eventually able to take my wife’s spousal RRSP money out of the fund, penalty free, in 2014. I fell prey to the greedy days of the Canadian oil boom and lost a fair bit in 2016 when the oil market fell, but other than that, I have been investing fairly well and have moved a lot towards the income funds, REITS, split shares, and covered call ETFs. Time has been the important factor, as I need to build a nest egg of stable income soon. Time is also the main factor for staying away from the slow growth of more blue chip companies. I wouldn’t advise anyone to follow my path, as it seems a little unsettling to only invest in ETF’s and funds that have companies in their holdings, rather than investing in the companies themselves, but the income stream has been steadily improving and I am very close to my annual dividend goal and looking at retiring from my job next year. I’m looking at using this income stream now to start investing in more solid options without the level of risk I am currently taking.
Thanks for sharing your story and glad to see that you have been able to recover and achieve retirement soon.
I am heavily invested in split share funds during the accumulation phase. Similar reason to Kyle. I started late. The monthly distributions I recieve, added to my deposits into my investing accounts have allowed me to invest more money sooner. Split share funds are great if you understand how to use them and they are not all the same. I use ENS, GDV and RS as long term safe and reliable payers. I consider these low risk. I buy and hold. And hold significant dollars in them.
Then I use medium risk ones like bk, lbs, dfn, ftn as yield multipliers. May not hold forever and I do not hold as much money in them.
Lastly there are high risk DF, FFN, DGS. These I hold small percentages in, I only buy them when they are not paying out distributions or after overnight offerings. I then sell portions of my holdings when they start paying, to capitalize on significant price gains. As well as crazy high yield on cost.
It’s a good system but you need to really understand the cycles.
Thanks for your comment Tyler. Looks like you figured something out for yourself but it seems to be a fair amount of work. Do you conclude it’s worth it? What’s the total return on your portfolio according to your broker? Are you over 10% annual rate of return?
Also, yield on cost is meaningless … Use market yield instead. I makes people feel good but doesn’t provide any useful portfolio insight. I went over it on this post: https://dividendearner.com/should-i-use-yield-on-cost/
Historically, GDV/SBC have a perfect record, not missing a single dividend payment, even during the pandemic. Even the split corps with 13-16% yields are still really good if they just miss 2-4 payments per year (adjusted on an annual basis it still works out to 10%). I prefer split corps over covered call investments but there is inherent risk since the NAV operates independent of their actual stock price. Then there’s overnight offerings which throws a monkey wrench into the timing…