Back in December of 2009 Larry MacDonald of Canadian Business Online interviewed The Dividend Guy and myself on the investment product Dividend 15 Split Corp (DFN) which at that time was paying a reported 11% dividend. Our comments in the post, titled Looking at dividend yield of 11%, dealt mainly with the risks of investors looking to an investment based solely on yield and not understanding how an investment works or the risks involved that may not be apparent at first glance.
Quadravest Capital Management Inc. has a new product out this month, Dividend Select 15 (DS), which is a similar product that concentrates holdings in 15 Canadian investments and uses options to supplement and add extra income to achieve a targeted payout on the investment.
My opinion on these types of products can be found at the bottom of Larry MacDonald’s post and any investor considering this product should read the prospectus prior to initiating a position. Understanding the risks and limitations of such a product is very important.
I read the feedback TDG and yourself gave on these types of products. While I agree that the fees are so deeply embedded in the product confusion is likely for all but the most astute financial minds I wonder why this lack of transparency is viewed as dangerous as the two of you indicate? If the yield is consistent and that is what the share owner wants, and as long as the dividend continues to be paid – would this type of product not be attractive?
Sustainable PF: my issues with the lack of transparency has two fronts: one trading fees & second the fact that many investors look to yield first without understanding how that return is possible.
Costs aside any investor has to be comfortable with the management team using options to achieve a level of income that the dividends themselves can't.
I'm not saying its a "bad" or horrible investment; just an investor should understand what it is and not assume that its something it is not.
Having read your post I'd like to get your thoughts on Claymore Canadian Financial Monthly Income ETF Symbol : FIE. It offers a return of 7% and a "consistent" monthly cash distribution of $.04 a unit. Do you think the payout is sustainable without adversely effecting the NAV?
Or is this product similar to the one you noted today in your email.
SS: I'll try to take a few moments this weekend for next Monday's post to look at FIE and comment.
If the stock market continues to go up or stays range bound, all is well… If we get another pullback they will cut the 'dividend' and/or the Fund's NAV will spiral downwards.
http://www.theglobeandmail.com/globe-investor/personal-finance/rob-carrick/this-7-per-cent-yield-comes-with-questions/article1812572/