A yield to caution

Article Excerpt

FINANCIAL 15 SPLIT CORP. $9.38 (Toronto symbol FTN; Shares o/s: 28.3 million; Market cap: $265.5 million; Dividend yield: 16.3%; www.quadravest.com) holds shares of 15 big Canadian and U.S. financial companies, including Bank of Nova Scotia, TD Bank, Manulife, Sun Life, CI Financial, and Citigroup. Financial 15 yields a very high 16.3%. Still, its income does not cover those high distributions to its shareholders. To make up the difference, it must realize capital gains on its securities. Those gains are far from guaranteed, so it sells call options on its stock holdings. Selling call options generates an income stream; however, that can limit capital gains on its portfolio. Namely, when the stocks it owns go up, holders of any call options on those stocks will buy them from the trust at the agreed-upon price. That means the company loses out on any future price gains. Meanwhile, Financial 15 needs to hang on to its poor-performing stocks to offset its outstanding call options. That tends to generate…

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