Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

Are split-shares safe for building a dividend portfolio?

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By Bob Lai, Tawcan

Special to Financial Independence Hub

Image Courtesy Tawcan/unsplash

Lately, I have received many emails and questions on Twitter [now X] asking me about split-shares, or split-share corporations (split corp for short).

Specifically, are split-shares safe for building a dividend portfolio? Some readers also asked why I haven’t included split-shares like DFN.TO and LBS.TO in the best Canadian dividend stocks list or the best Canadian dividend ETF list.

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.

Ticker Fund Name Price Yield %
BK.TO Canadian Banc Corp. $13.08 15.19%
DF.TO Dividend 15 Split Corp. II $4.03 0% (suspended)
DFN.TO Dividend 15 Split Corp. $6.43 17.94%
DGS.TO Dividend Growth Split Corp. $5.08 23.39%
ENS.TO E Split Corp. $14.59 10.60%
FFN.TO North America Financial 15 Split Corp. $4.00 0% (suspended)
FTN.TO Financial 15 Split Corp. $8.85 16.83%
GDV.TO Global Dividend Growth Split Corp. $9.50 12.45%
LBS.TO Life & Banc Split Corp. $8.70 13.59%
LCS.TO Brompton Lifeco Split Corps. $6.40 14.06%
LFE.TO Canadian Life Companies Split Corp. $3.70 0% (suspended)
OSP.TO Brompton Oil Split Corp. $4.19 0% (suspended)
PDV.TO Prime Dividend Corp. $5.76 12.63%
PIC.A Premium Income Corporation $4.90 16.59%
PRM.TO Big Pharma Split Corp. $14.50 8.50%
PWI.TO Sustainable Power & Infrastructure Split Corp. $6.28 12.74%
RS.TO Real Estate Split Corp. $14.25 10.96%
SBC.TO Brompton Split Banc Corp. $9.87 12.12%
SBN.TO S Split Corp. $2.78 0% (suspended)
TXT.UN Top 10 Split Trust $2.70 0% (suspended)
WFS.TO World Financial Split Corp. $1.40 0% (suspended)
XTD.TO TDb Split Corp. $4.05 0% (suspended)
YCM.TO Commerce Split Corp. $1.39 0% (suspended)

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.

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…

Understanding ETF Distributions

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What Are ETF Distributions?

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By Erin Allen, VP, Online Distribution, BMO ETFs

(Sponsor Content)

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…

Financially Surviving a High-Net-Worth Divorce

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By Devin Partida

Special to Financial Independence Hub

Navigating a divorce can be stressful, especially if you have considerable financial assets. While legal separations can be nasty, they don’t have to be.

Discover what counts as a high-net-worth divorce, along with some tips to help you survive it with most of your financials intact.

What is a High-Net-Worth Divorce?

Traditionally, high-net-worth divorces are considered a split of US$1 million dollars between parties. Considering the increased property values and inflation in recent years, a high-net-worth divorce now involves several million dollars worth of financial assets. If you have assets amounting to this sum, you’re looking at a high-net-worth divorce in your hands.

What makes High-Net-Worth Divorces complicated?

Divorce in the U.S. is still prevalent, with estimates that 50% of first marriages will most likely end in divorce. That’s a lot of legal proceedings and assets to divide. Parties with fewer assets to divide often have more uncomplicated legal matters to resolve.

Divorce proceedings get more complex since you have millions of dollars worth of assets to take care of. Many factors come into play, like assets and liabilities acquired before and after the marriage, businesses owned by either or both spouses and investment or pension plans.

Tips on how to Safeguard your Interests during and after a High-Net-Worth Divorce

Wealthy couples typically have a lower divorce risk, but there may come a time when one or both parties decide to call it quits. Although high-net-worth divorces typically involve top-caliber lawyers and advisors, it’s still essential to research what to expect during legal proceedings. Doing so will help you prepare better for the process and safeguard your financials.

Get Expert Legal and Financial Advice

Divorce can be a physically, mentally and emotionally draining process. It’s also time-consuming if you have no idea how to proceed. Getting expert legal and financial advice can save you time and money, especially if you hire lawyers who have your interests in mind.

Hiring an expert mediator is one of the most underrated ways to ensure smooth divorce proceedings. Divorce mediation involves protecting both parties and safeguarding their interests from a neutral standpoint: each side gets what is rightfully theirs, no more and no less.

Know which Assets to Protect

Distinguishing between marital and separate assets is critical to protecting your financials in a divorce. You must ensure you know the value of your assets like properties, businesses, investments and so on. Catalog them depending on their classification so you know which assets to protect from division.

Here’s what you need to know about the difference between marital and separate assets. Continue Reading…

2023 Financial Year in Review | 2024 Investment Market Outlook

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Lowrie Financial/Canva Custom Creation

 

By Steve Lowrie, CFA

Special to Financial Independence Hub

You might assume, the more experienced a financial professional is, the more accurate they can be with their year-end forecasts. Personally, I’ve never tried to predict which hot or cold stocks, bonds, sectors, or market sentiments to chase or flee each year. Instead, the more experience I’ve gained, the more firmly I believe in the Timeless Financial Tips I shared throughout 2023. For me, they serve as the best guide for “predicting” what investors should expect in 2024.

So, considering everything I’ve learned in 2023 (plus the quarter-century prior), I predict …

We cannot possibly predict how 2024 markets will perform.

That’s my expert forecast, and I’m sticking to it. I will, however, add one more prediction, about which I am nearly as certain …

Over time (think multiple years), capital markets WILL deliver positive returns to those who consistently participate in their expected growth.

The 2023 Allure of 5% GIC Returns

If anything, 2023 offered fresh lessons on why it’s better to stick with the financial fundamentals and avoid the perils of market-timing.

As you may recall, we were still licking our 2022 wounds in January 2023, after experiencing an unusually perfect storm of negative annual returns from stocks AND bonds, along with continued high inflation. How unusual was 2022? I looked for the last time investors had experienced across-the-board negative annual returns, plus steep inflation and couldn’t find an example of this, at least in my career.  1994 was the last time both stock and bond returns were negative, however Canadian Inflation (CPI) was a scant 0.25% that year.

Given the 2022 backdrop, no wonder many investors were drawn to GICs and their alluring 5% interest rates in 2023.

It is true, GICs can be helpful for your rainy day funds and similar cash reserves that are awaiting their spending fate. But in 2023, I also saw people using (or, more accurately, abusing) this vehicle to sideline investable cash indefinitely, waiting for seemingly better days to jump into the market. Worse, some investors might have sold off portions of their existing investment portfolio to chase after GIC rates.

Safe Harbors can be a Risky Bet

Unfortunately, waiting for “better” markets before investing or reinvesting according to plan is still market-timing by any other name. And as I’ve covered before, market-timing ignores myriad investment fundamentals.

Among the most important insights to take to heart is how rapidly market tides can turn, leaving the unprepared out of luck. As one of my financial planning colleagues recently described:

“Small hinges swing big doors. [Market] Prices are brutish, irreverent, and unsympathetic to investors putzing about on the sidelines.” – Rubin Miller, Fortunes & Frictions

This message was on clear display in 2023. Talking about swinging markets! I’m willing to bet few, if any of us were expecting such strong annual returns for 2023, especially since most of the reward hinged on a year-end pop.

And yet, it shouldn’t really have come as such a big surprise. It’s exactly how global markets have repeatedly performed over time. It just seems as if investors forget this fundamental every time markets take a break from their historically uphill climb. Continue Reading…

2024 Canadian Retirement Income Guide: 10 potential sources of income

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By Ted Rechtshaffen, CFP

Special to Financial Independence Hub

Over the years, we have received thousands of questions from clients related to a wide range of financial and planning issues.  Without doubt, the highest volume of questions relate to how to manage the transitions from working to retirement.

To help address many of these questions, we have put together the 2024 Canadian Retirement Income Guide.  This can be found on the link here: Canadian Retirement Income Guide – TriDelta Private Wealth.

The Guide highlights ten different sources of retirement income.  Some range from the very common, Canada Pension Plan, to those that may only apply to some – life insurance, corporations, or home equity. The Guide is free and doesn’t require any input to get it (such as name or email.)

Perhaps the most common question is whether to take CPP at age 60 or 65 or even 70.  The thoughts around a potential answer are discussed in the Guide as well as providing a link to a CPP calculator (CPP Calculator – TriDelta Private Wealth) and guidance on how to work with Service Canada.  Similar discussions and links relate to Old Age Security (OAS), ranging from taking it at 65 to age 70, and also factors that might help you to avoid any clawbacks.

Other factors that need to be considered include minimizing taxes, not just for one year, but over the entire post-work period.  One of the reasons for looking at every possible source of retirement income is that this can be the key to planning out the lowest tax retirement.

Some strategies discussed that could lower taxes could include:

  • Delaying OAS and CPP to age 70, but drawing down RRSPs between retirement and age 70 – if you are healthy. The lower income drawdown of RRSPs will result in lower taxes, while helping to maximize government pensions and potentially maintaining full OAS payments.
  • Using a balance of non-registered assets or a home equity line of credit, to keep taxable RRIF income a little lower. Continue Reading…