December 10, 2008, 6:00 am

Investing with Split Shares

by: The Financial Blogger    Category: Investment, Market and Risk,Trading
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You are looking for an investment that provides high dividends? Your broker might have offered you some banks split shares. This is an interesting way of getting high dividend from well establish companies. However, if you buy the full split shares upon emission, you might have a big surprise when you look at your investment portfolio in a few years…

What are split shares anyway?

Yup, another great financial product designed by someone at Wall Street ;-). Split shares are a combination of a preferred share (non voting, high dividend) and a portion of a stock market share (this part is leveraged). Therefore, when you pay your split share $25, you get a $10 preferred share giving a high dividend (6% let say) and a $15 share portion of the company stock.

The preferred share value won’t budge much since it is considered almost as a note. You are the first shareholder to get your dividend and the value of your share is not influenced too much by market fluctuation.

The other portion is high volatile since a part of the money is leverage to follow the actual stock price. This is why when the market falls, this part of the split shares will drop tremendously. On the other side, in a bull market, you are on the right train 😉

How can I benefit from the good dividend from the split share without having to live with the volatility of its underlying stock?

Quite simple 😉 When the company issue split shares, you have to buy both the preferred and the leveraged stock. However, the next morning, everything is available on the market. Therefore, you have the option of buying only the preferred share (with a high transaction cost) and get your dividend in your pockets.

This is a great way to reduce the volatility of your portfolio with another type of fixed income giving much more than GIC’s.

However, you must not put all your money in the same basket. Unfortunately, since the preferred shares don’t move too much, the trading volume on this type of financial product is limited. Therefore, if you have $35K invested in the same preferred stock and you wish to use this money for something else. You may need a few weeks to liquidate your position.

I thinks it is a good fixed income alternative and even some private wealth management product incorporate them in their investing strategy. You must always keep in mind that preferred shares are still corporate shares and still represent a certain level of risk… For example, I wouldn’t be too hot buying Citi Corp preferred shares these days… even if they get me a 7% yield 😉

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I own some of these and should have sold off the regular share portions as soon as I could, they got hammered.

by: The Financial Blogger | December 10th, 2008 (9:53 pm)

I actually the dark side of split shares with one client who add them with another broker… he transfered not so long ago 😉

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