ETF of Canadian Dividends

11/03/2014 9:00 am EST

Focus: ETFs

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Canada is home to many unflappable companies, thanks to a strong business environment and a conservatively run economy that avoids excessive debt. In addition, the business culture in Canada is very pro high dividends, asserts Benjamin Shepherd in Global Income Edge.

A tangible expression of this culture is Dividend 15 Split Corp. (TSX: DFN), which is a Canadian mutual fund that was created for the sole purpose of paying its shareholders a steady distribution by harnessing the dividend-paying power of Canadian companies.

It’s like an American closed-end mutual fund in that it mainly invests in 15 high-quality, high-yielding Canadian stocks. It then passes the dividends it receives from those stocks and any capital gains it locks in to its shareholders.

The ETF currently pays 9 cents per share per month, which provides a current yield of 10.2%.

Managed by Quadravest Capital Management, the fund’s holdings at any given time won’t deviate much from a fixed list of companies, though it doesn’t really disclose its investment process.

Overall, the 15 core companies the fund holds have increased their dividends by 5.8% over the past five years.

Quadravest can also invest up to 15% of its assets in other companies; it recently held small stakes in wealth management firm AGF Management; food retailer Loblaw and TMX Group, a financial firm that is a market maker in stocks.

Quadravest also boosts the fund’s income by selling what are known as covered call options on its portfolio holdings. Also known as a “buy-write” strategy, it can be quite lucrative.

The money made selling those options can then be passed on to the fund’s investors as capital gains.

Of course, Quadravest doesn’t provide its services for free, collecting an annual management fee of 0.65% of assets and another administration fee of 0.1% of assets.

Those fees are actually lower than most American closed-end funds, a notable feat since option investing programs can be expensive to run, and well worth the cost considering the predictable dividends the fund has maintained.

From a tax perspective, it is important to keep in mind that the fund’s distributions are subject to a 15% Canadian dividend withholding tax.

However, those Canadian taxes can be recovered by filing Form 1116 with your 1040, essentially, filing for a foreign tax credit.

Combining a winning strategy of investing in strong Canadian companies with an options income kicker, Dividend 15 Split is a buy up to $15.

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