Many retirees are looking to boost their income through their investment portfolios. One way to boost your yield, while still maintaining a higher level of safety, is with split shares.
What is a split share?
A split share is a unique type of derivative investment product (also called a structured product). The “risk/reward” of common shares is broken down into two components and allocated differently.
A split share corporation (or closed-end trust) is created for a finite period of time – usually 5 to 7 years – to redistribute the income and capital gains to separate groups of investors.
Split Share Corporation
A split share corporation is formed with the sole purpose of buying and holding one or more companies in a portfolio of dividend paying common shares. Examples are:
- BNA.PR.C – Brookfield Asset Management (single underlying company)
- BBO.PR.A – Banks and Oil and Gas Companies (multiple underlying companies)
It then issues 2 classes of shares – capital and preferred – to the investing public.
It becomes a closed-end fund, which means the corporation issues a limited number of units that are not offered on a continuous basis.
Instead, both classes of units trade separately on a stock exchange.
Related: What are segregated funds?
The corporation generally has an equal number of preferred shares and capital shares outstanding. Some allow the capital shareholders to redeem their shares back to the corporation on specific dates, usually one day per year.
On the maturity date, the underlying shares are sold and the net sales proceeds are distributed to the shareholders. The preferred shareholders have first claim and then the capital shareholders receive the remainder (if any) of the net sales proceeds.
The capital shareholders are seeking capital appreciation rather than income and the rewards can be more magnified than owning the underlying shares directly due to the ability of the corporation to use leverage. Therefore, they assume a greater level of risk.
Features of Preferred shares
Preferred shares are geared to income-oriented investors who receive regular cumulative dividends at a fixed rate. The dividends are subject to the normal gross up and dividend tax credit rules.
They hold a preferential claim on the net asset value of the portfolio of assets but don’t benefit from any of the capital gains that are generated. Instead, they receive the return of their original investment on the maturity date.
Yields are often higher than traditional preferred shares of similar quality due to lower prices. The lower cost is largely because there is less demand and consequently, thinly traded, so there is a liquidity risk.
Final thoughts on Split Shares
The most common portfolio holdings of split share corporations are common shares with a history of stable dividend payments, which makes them attractive to income investors who want dividend income with a lower risk of loss of principal.
Good yields are available and split preferreds are usually a pretty good investment but, as with any other investment, check it out for yourself (particularly the underlying assets) before committing your funds.