The wrong way to invest in Canadian dividend stocks

Canadian Dividend Stocks Banks

Every Monday we feature “A Stock to Sell” as our daily post. With every stock or investment we recommend as a sell, we give you a full explanation of why we advise against investing in it at this time. This week, we explain why a split-share company that holds some of the best Canadian dividend stocks is still a risky investment.

Canadian Banc Corp. is a split-share company with two types of stock: capital shares (symbol BK on Toronto) and preferred shares (symbol BK.PR.A on Toronto).

The company holds shares of the six biggest Canadian banks.

Split-share companies typically issue two classes of stock. Usually the capital shares get all or most of the capital gains and losses, as well as variable dividend income, and the preferred shares get a fixed amount of dividend income.

In the case of Canadian Banc Corp., the capital shares receive dividends monthly at a rate determined by applying a 10% annualized rate on the capital shares’ average market price over the last three trading days of the preceding month. The June 2015 dividend is $0.10933 a share, May was $0.11483, April was $0.11625 and so on.

The capital shares’ annualized yield is 10.2%, based on the latest monthly payment.


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Best Canadian dividend stocks: Investors better off purchasing these bank stocks directly

The dividend income the company gets from its portfolio of bank shares isn’t enough to pay capital and preferred share dividends, plus management expenses of 1.35%, in addition to providing a return for the capital shares. To make up the difference, the company has to make a profit by trading its portfolio. It also aims to raise its returns by writing call options on the portfolio’s securities.

Selling call options generates a stream of income for the investor (and a stream of commissions for the brokerage firms involved). However, selling calls also tends to diminish any capital gains a portfolio might generate.

When stocks the company owns go up, holders of the call options it has sold will exercise those options and buy the stock from it at the price fixed by the option’s terms. Meanwhile, the company will want to hold on to its losers—stocks it owns that are going down—to offset its obligations under the call options it has sold.

We see five of the six stocks Canadian Banc Corp. owns as buys (TD Bank, CIBC, Royal Bank, Bank of Montreal and Bank of Nova Scotia). The sixth stock, National Bank, is okay to hold. However, you are better off purchasing these stocks directly.

While dabbling in options can generate income, in our opinion it will eventually lead to a lower rate of return, if not outright losses.

TSI Network recommendation: SELL both capital and preferred shares.

Comments

  • Robert H.

    Split shares of any type are notoriously bad, and rely on deft active and frequent trading. Even these traders are ultimately no match for ‘the house’ and will either get trapped or constrained by an options position that they can’t get themselves out of.

    If you can afford $6,000 worth of split shares, buy 100 shares of TD instead and put them in a DRIP and go back to bed.

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