Welcome to another Then and Now post, a continuation of my series where I revisit some older blog posts and either rip them to shreds (because my thinking has totally changed on such subjects) or I’ll confirm my position on some subjects including some specific stock or ETF investments.
Instead, I’ll share my investing history with a low-cost tech ETF: QQQ.
You can read about my previous Then and Now posts on certain stocks (good and bad!) at the end of this post.
Then – QQQ
Passionate readers and subscribers of this site will know, I’m a HUGE fan of not just dividend-paying stocks but low-cost ETFs as well.
The reason for owning some ETFs beyond some dividend growth stocks is simple: I cannot predict which stocks will truly succeed long-term.
So, owning low-cost ETFs is a hedge against how I’ve largely unbundled my Canadian ETF for income, beyond holding a few U.S. stocks for mostly portfolio defence.
I mentioned in my reply that was like splitting hairs given both low-cost U.S. ETFs have and will likely continue to deliver very similar, strong returns.
“Whether you invest in U.S.-listed VTI, ITOT, SPY, IVV or another low-cost U.S. fund that tracks the U.S. S&P 500 or the U.S. total market, I think you’re picking a winning long-term equity product for your portfolio.”
I’ve been right, at least historically speaking.
Source: Portfolio Visualizer.
But even before that post, I invested in a small amount low-cost tech ETF QQQ – not because I didn’t think VTI, ITOT or other S&P 500 ETFs were bad choices, not at all, just that I believed at the time Invesco’s QQQ could perform better.
“Invesco QQQ ETF gives you access to a diverse group of cutting-edge Nasdaq-100 companies — all in one fund.” – Invesco
Since launch in 1999 (gosh, I wish I owned it then!) QQQ has demonstrated a history of outperformance, typically beating the S&P 500 Index. Continue Reading…
With an initial look, these split-shares are extremely enticing and attractive due to the very high yields. Are there risks associated with these split-share corporations? Should one build an investment portfolio with them to generate dividend income?
List of Canadian split-shares
Before we dive deeper into the details, here is a list of available Canadian split shares I can find, the share price, and the yield percentage. CanadianPreferredShares.ca keeps an updated list of all Canadian split-share corporations issued in the Canadian market.
As you can see from the table, most of these split-shares provide a 10% or higher distribution yield. This is extremely attractive if you’re seeking regular investment income.
You will also notice that some split-shares have suspended their distributions. This is due to how split-shares are structured, distributions will only get paid out if the Unit Net Asset Value (NAV) is over a certain threshold. More on that later …
What are split-shares?
So what are split-shares or split corps? Unfortunately, not many investors are familiar with them, due to how they are set up. I certainly had to do a bit of research to understand the details.
First, a split-share corporation is set up by investing in a selection of stocks, like banks, utilities, pharmaceuticals, pipelines, etc. For example, Dividend 15 Split Corp. (DFN.TO) invests in 15 stocks: Bank of Montreal, Bank of Nova Scotia, BCE, CI Financial, CIBC, Enbridge, Manulife, National Bank, Royal Bank, Sun Life Financial, Telus, Thomson Reuters, TD, TransAlta, and TC Energy.
Within the split-share corporations, two classes of shares are available: Preferred Shares and Class A or capital shares. Investors can choose to hold both types of shares or just one. These two different kinds of shares are traded on the stock exchanges and can be purchased from online brokers like Questrade or National Bank Discount Brokerage.
Preferred Shares are designed for the more conservative investors who seek regular monthly distributions. Preferred shares typically have a finite term (e.g. 5 years but usually get renewed) and have a claim on fund distributions first. No capital gains or losses from the underlying holdings will impact preferred shares. In other words, the preferred shares are structured like a fixed-income vehicle.
Similar to how other preferred share stocks work, while distributions are quite safe, there’s usually a limited capital appreciation potential. There’s no management expense ratio (MER) associated with these split share preferred shares as fees are paid by the Class A shares. Continue Reading…
Fixed-income securities are financial instruments that have defined terms between a borrower, or issuer, and a lender, or investor. Bonds are typically issued by a government, corporation, federal agency, or other organization. These financial instruments are released so that the issuing institution can raise capital. The borrower agrees to pay interest on the debt security in exchange for the capital that is raised.
The maturity refers to the date when a bond’s principal is paid with interest to the investor. In the modern era, interest rates tend to fluctuate over long periods of time. Because of this, shorter-duration bonds have predictable rates. The longer investors go down the maturity spectrum, the more volatility they will have to contend with in the realm of interest rates.
On January 16, 2024, Harvest ETFs unveiled its full fixed income suite. That means investors will have access to ETFs on the full maturity spectrum: short, intermediate, and long-duration bonds.
The two types of short-term bonds for investors chasing security
Short-term fixed income tends to refer to maturities that are less than three years. In the realm of short-term fixed income, we should talk about the relationship between money market and short-term bonds.
Money market securities are issued by governments, financial institutions, and large corporations as promises to repay debts, generally, in one year or less. These fixed-income vehicles are considered very secure because of their short maturities and extremely secure when issued by trusted issuers, like the U.S. and Canadian. federal governments. They are often targeted during periods of high volatility. Predictably, money market securities offer lower returns when compared to their higher-duration counterparts due to the liquidity of the money market.
Short-term bonds do have a lot in common with money market securities. A bond is issued by a government or corporate entity as a promise to pay back the principal and interest to the investor. When you purchase a bond, you provide the issuer a loan for a set duration. Like money market securities, short-term bonds typically offer predictable, low-risk income.
The Harvest Canadian T-Bill ETF (TBIL:TSX) , a money market fund, was launched on January 16, 2024. This ETF is designed as a low-risk cash vehicle that pays competitive interest income that comes from investing in Treasury Billds (“T-Bills”) issued by the Government of Canada. It provides a simple and straightforward solution for investors who want to hold a percentage of their portfolio in a cash proxy.
Medium-term bonds and their influence on the broader market
When we are talking about intermediate-term bonds, we are typically talking about fixed income vehicles in the 4-10 year maturity range. Indeed, the yield on a 10-year Treasury is often used by analysts as a benchmark that guides other interest rate measures, like mortgage rates. Moreover, as yields increase on intermediate-term bonds so too will the interest rates on longer duration bonds.
Recently, Harvest ETFs portfolio manager, Mike Dragosits, sat down to explore the maturity spectrum and our two new ETFs. You can watch his expert commentary here.
US Treasuries avoided an annual loss in 2023 as bonds rallied in the fourth quarter. These gains were powered by expectations that the US Federal Reserve (the “Fed”) was done with its interest rate tightening cycle. The prevailing wisdom in the investing community is that the Fed will look to pursue at least a handful of rate cuts in 2024. Continue Reading…
Podcasting has become an influential medium for sharing stories, ideas, and expertise. However, creating a successful podcast goes beyond just recording and publishing episodes; it involves building a dedicated audience that will eagerly tune in to your content. In this guide, we’ll break down the process of podcast audience building into manageable tasks, provide realistic timelines, and offer essential summary information to help you maximize your podcast’s reach and impact.
Task 1: Define Your Niche and Target Audience (Week 1-2)
Before diving into podcast production, take the time to identify your niche and target audience. Understanding your audience’s interests and preferences will guide your content creation and set the foundation for effective audience engagement. Use tools like surveys, social media polls, and analytics to gather insights. Once you have a clear understanding, create a listener persona to help tailor your content to their needs.
Task 2: Develop a Consistent Content Schedule (Week 3-4)
Consistency is key in podcasting. Establish a realistic and sustainable content schedule, whether it’s weekly, bi-weekly, or monthly. Stick to a reliable release day and time to build anticipation among your audience. Consistency not only helps retain existing listeners but also attracts new ones who appreciate a reliable source of valuable content.
Task 3: Optimize Your Podcast for Search (Week 5-6)
Boost your podcast’s discoverability by optimizing it for search engines and podcast directories. Craft a compelling podcast title, write a detailed description using relevant keywords, and choose an eye-catching podcast cover art. Submit your podcast to major directories like Apple Podcasts, Spotify, and Google Podcasts. A well-optimized podcast increases the likelihood of reaching new listeners organically.
Task 4: Leverage Social Media Platforms (Week 7-8)
Create a robust social media strategy to promote your podcast across various platforms. Establish a presence on platforms such as Instagram, X [formerly Twitter], Facebook, and LinkedIn. Share engaging content, such as episode highlights, behind-the-scenes glimpses, and interactive polls. Utilize relevant hashtags and collaborate with influencers or other podcasters to expand your reach.
Building a podcast audience is not just about numbers; it’s about fostering a community. Actively engage with your audience by responding to comments, emails, and social media messages. Consider creating a listener feedback segment in your episodes to encourage participation. The more connected your audience feels, the more likely they are to become loyal, long-term listeners.
Invite relevant guests to your podcast to bring diversity and expertise to your content. Collaborating with influencers or experts in your niche can introduce your podcast to their existing audience, expanding your reach. Plan collaborations strategically to align with your content and appeal to both your guest’s followers and your own. Continue Reading…
ETF distributions are payments made by an ETF [Exchange Traded Fund] to its shareholders. In non-registered accounts, these distributions are taxable to the investor in the year they are received and may include dividends, interest income, capital gains, and return of capital (which is non-taxable).
ETF distributions are typically paid out in cash; however, year-end distributions may be received “in-kind” and reinvested. Whether a distribution is received in cash or reinvested, it has the same tax impact for a non-registered investor. The tax impact will depend on the type of distribution received (interest, dividends, or capital gains) and will be reflected on an investor’s year-end tax slip.
Types of ETF Distributions
Canadian Dividends: Dividend distributions occur when an ETF invests in Canadian equity securities that pay dividends. Canadian residents qualify for a dividend tax credit, if the ETF invests in Canadian securities that pays dividends.
Interest and Other Income: Fixed Income ETFs earn interest on their investments in bonds and other debt obligations. When an ETF pays our distributions as interest and other income, distributions are taxed as ordinary income.
Capital Gains: An ETF may incur capital gains if an underlying security in the ETF is sold for more that its purchase price. Only 50% of the capital gain is included in the investor’s taxable income.
Foreign Income & Foreign Tax Paid: When an ETF earns dividends or interest on foreign investments the ETF may have to pay foreign withholding tax. When an ETF distributes this foreign income, a Canadian investor may be able to claim a foreign tax credit in respect of the associated foreign tax paid by the ETF.
Return of Capital: An ETF may distribute a portion of your initial investment. This is considered return of capital and is not taxable to investors. However, such a distribution will decrease the ACB (adjusted cost base) of the investor’s units. When the investor sells the ETF units the lower ACB will increase the capital gain (or decrease the capital loss) that would otherwise be realized on the sale.
Reinvested “Phantom” Distributions: Phantom distributions are the reinvestment of unpaid capital gains that an ETF may realize if an underlying security in the ETF’s portfolios sold for more than its purchase price. Learn More here
What triggers a Capital Gain?
An ETF could incur a capital gain if one of the following events occur:
Performance – If the ETF experiences positive returns since purchase and the underlying investment is sold, the ETF could realize a capital gain.
Corporate Action – When a merger or acquisition occurs resulting in a disposition of one of the underlying holdings, the ETF may realize a capital gain.
Portfolio Rebalancing – When this occurs, the ETF will trade the underlying securities, which could result in a capital gain.
More on Return of Capital (ROC)
Any distribution that is paid out in excess of taxable income is classified as ROC. For cash distributions paid throughout the year, BMO ETFs generally distributes based on the underlying portfolio yield less expenses. This benefits investors by providing greater certainty on the payout. As the ETF grows, the income earned is allocated across unitholders.
The important consideration for ROC, is whether it impacts the sustainability of the distribution. We define good ROC as sustainable, where the invested capital is not depleted over time. We define bad ROC as dipping into the invested capital to support the distribution, which leaves less investment for future years.
Timing of Distributions
Distributions are paid to investors based on the number of units they hold of an ETF on its “record date”. The record date is generally the business day prior to the distribution date. The frequency and amount of distributions can vary between different ETFs. Investors should review an ETFs prospectus or website to understand the distribution policy and schedule before investing.
If you are purchasing an ETF and would like to receive that month’s distribution you must do so before the ETF’s “ex-date,” this will ensure you are on record for the payment. Continue Reading…
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