SPLIT SHARE CORPORATIONS EXPLAINED | DIVIDENDS YIELDS ON STEROIDS FOR HIGH INCOME SEEKING INVESTORS!

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The 5 main Takeaways to remember about to Split corps:

They are designed specifically for Income investors trying to squeeze out as much income as possible from a portfolio of High quality Dividend paying stocks
It's called a split because there are 2 classes of shares, each with their own stock symbol. Preferred shares, and Capital Shares (Sometimes called Class A shares)
The Preferred shares are not worth looking at in my opinion as they are essentially like ordinary preferred shares and have a low fixed dividend yield . If you want consistent and safer income it's much more lucrative to invest in Covered Call ETFs.
The Capital Shares or Class A shares is where the Yield power is. Using Leverage and Covered Calls, the fund is able to pay high dividend yields which in most cases are over 10% Annually.
Split Corporations typically have a NAV threshold or a “NAV minimum” in order for the dividends of the Capital shares to be paid out.
Split Corporations, or Split Share funds are similar to Dividend ETFs. They typically hold a portfolio of Dividend Paying stocks.It can be 10 stocks, 50 stocks or even 1 Stock believe it or not.

It's called a Split because there are 2 classes of Shares, Preferred Shares and Capital Shares (Sometimes called Class A shares). Each one trades under their own stock symbol and has a separate NAV… or Net Asset Value. More on that a little later…..

For example, a popular Split Share fund in Canada called Dividend 15 has the Preferred shares listed with stock symbol DFN.PR.A and the Capital shares are listed with the Stock symbol DFN.

Now i won’t be talking about the Preferred shares too much because after analysing pretty much all the Split share funds on the Canadian Stock market, i came to the conclusion that they are simply not worth it. Like Preferred shares in general, they are classified as “Fixed Income” Securities, like Bonds. The ones I analysed tend to have a fixed dividend Yield of about 5%-5.5% so you can easily find better value elsewhere, like with a Covered Call ETF.

It's the Capital shares that are interesting and have the really high dividend yields.

So how are the 2 types of Shares funded or how do they generate the dividend payments to us, the shareholders. Well , for the Preferred Shares is pretty simple, they are funded with the dividends from the dividend stocks within the portfolio. Also, in terms of stock price fluctuation, they tend to move very little.

The Capital Shares are funded by any left over dividends plus other income producing strategies the fund manager uses. The most common method is using covered calls.

I absolutely love the Covered Call strategy and own a lot of Covered Call ETFs.If you don't know what a Covered Call strategy is, check out my other videos where I discuss it in detail.Simply put, it's a 0 risk strategy to boost the dividend yield. This is achieved by selling call options on the stocks within the portfolio.
It’s now time to discuss the risk involved with these funds. There is essentially 1 but very important risk to explain, and this is what took me a while to understand fully.

Like ETFs, the value of these funds, which changes daily with stock market fluctuations is tracked with a NAV, or Net Asset Value. You can see the NAV on the website for each of the funds, just like ETFs.

Now the NAV of a Split Share fund is calculated by combining the value of both the Preferred shares and Class A shares because they each have their own NAV. Combine the 2 and you have the “UNIT NAV”. So 1 UNIT NAV, is equal to the NAV of 1 Preferred Share and 1 Class A share.

And here’s the catch, … If the Unit NAV of the fund is below a certain threshold, the Class A shares will not get the monthly dividend. The dividend will only be paid out if the NAV is equal to, or higher than the NAV threshold. Almost all the Split Corps i analysed have a NAV threshold of 15$. It seems to be the common number… I guess it's just the way they are set up. Keep in mind this rule does not apply to the Preferred shares , as they are a fixed amount. This rule only applies to the Capital Shares.
Short Split Guide by Brompton Funds: https://www.bromptongroup.com/wp-content/uploads/2018/11/splitshare_primer2019.pdf

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