Author Topic: Understanding dividend, yield, etc. so I can decide about Fairfax Financial  (Read 1805 times)

dr_sassy

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Hi everyone,
Basic question: could someone please explain dividend, yield, dividend yield, and rate reset so I can decide what to buy? I usually buy index, but I have a bit of extra money I'm considering investing in something different, like FFH preferred shares. How on earth do you pick one?

Fairfax Financial Holdings Limited ("Fairfax") (TSX:FFH)(TSX:FFH.U) announces that it has declared the following quarterly dividends per share on its preferred shares:

Series of Preferred Shares      Dividend (C$)      Payment Date      Record Date
Series C      0.286125      December 30, 2016      December 16, 2016
Series D      0.22825      December 29, 2016      
Series E      0.18188      December 30, 2016      
Series F      0.16654      December 29, 2016      
Series G      0.207375      December 30, 2016      
Series H      0.19147      December 29, 2016      
Series I      0.23175      December 30, 2016      
Series J      0.20955      December 29, 2016      
Series K      0.3125      December 30, 2016      
Series M      0.296875      December 30, 2016      
Applicable Canadian withholding tax will be applied to dividends payable to non-residents of Canada.

Fairfax has also determined the quarterly dividend rates in respect of the December 30, 2016 to March 30, 2017 dividend period for its floating rate preferred shares. The rates, together with the dividends per share payable for such period (if and when declared), are set forth below:

Series of Preferred Shares      Rate (%)      Annualized Rate (%)      Dividend (C$)
Series D      0.91225      3.65901      0.22806
Series F      0.66542      2.66901      0.16636
Series H      0.76515      3.06901      0.19129
Series J      0.83745      3.35901      0.20936

How do you decide which one to buy? I started falling down the rabbit hole, trying to figure out rate reset, compare different funds, and ended up confused.

If you can point me in the right direction, I'd be grateful.
I did find this helpful:http://web.tmxmoney.com/quote.php?qm_symbol=FFH.PR.k vs. http://web.tmxmoney.com/quote.php?qm_symbol=FFH.PR.c because at least at the bottom, they compare dividend and yield. Should I just go through every one and pick the highest dividend and yield? So far, K is winning.

Thanks!
Melissa

financiallypossible

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Hi Melissa,

Dividends (or interest payments) are the amount in dollars and cents (or whatever currency) that the investment pays its owners.

Yield is the sum total of the dividend payments received over the course of the past year divided by your cost basis purchasing the investment.

When computing yield, always use your cost basis and not the current price of the investment.

Stocks tend to raise their dividends over time, so your yield can get larger and larger the longer you're willing to hold the asset.

Are you referring to preferred shares in a Canadian company? Benjamin Graham wrote in The Intelligent Investor that preferred shares need to be bought very cautiously and only at extreme discounts since the shareholder rights for preferred shareholders comes only after bondholders and common stock holders.

Perhaps Canadian laws/companies are different than the US in this aspect?

RichMoose

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Hi everyone,
Basic question: could someone please explain dividend, yield, dividend yield, and rate reset so I can decide what to buy? I usually buy index, but I have a bit of extra money I'm considering investing in something different, like FFH preferred shares. How on earth do you pick one?

Fairfax Financial Holdings Limited ("Fairfax") (TSX:FFH)(TSX:FFH.U) announces that it has declared the following quarterly dividends per share on its preferred shares:

Series of Preferred Shares      Dividend (C$)      Payment Date      Record Date
Series C      0.286125      December 30, 2016      December 16, 2016
Series D      0.22825      December 29, 2016      
Series E      0.18188      December 30, 2016      
Series F      0.16654      December 29, 2016      
Series G      0.207375      December 30, 2016      
Series H      0.19147      December 29, 2016      
Series I      0.23175      December 30, 2016      
Series J      0.20955      December 29, 2016      
Series K      0.3125      December 30, 2016      
Series M      0.296875      December 30, 2016      
Applicable Canadian withholding tax will be applied to dividends payable to non-residents of Canada.

Fairfax has also determined the quarterly dividend rates in respect of the December 30, 2016 to March 30, 2017 dividend period for its floating rate preferred shares. The rates, together with the dividends per share payable for such period (if and when declared), are set forth below:

Series of Preferred Shares      Rate (%)      Annualized Rate (%)      Dividend (C$)
Series D      0.91225      3.65901      0.22806
Series F      0.66542      2.66901      0.16636
Series H      0.76515      3.06901      0.19129
Series J      0.83745      3.35901      0.20936

How do you decide which one to buy? I started falling down the rabbit hole, trying to figure out rate reset, compare different funds, and ended up confused.

If you can point me in the right direction, I'd be grateful.
I did find this helpful:http://web.tmxmoney.com/quote.php?qm_symbol=FFH.PR.k vs. http://web.tmxmoney.com/quote.php?qm_symbol=FFH.PR.c because at least at the bottom, they compare dividend and yield. Should I just go through every one and pick the highest dividend and yield? So far, K is winning.

Thanks!
Melissa

First I would ask why preferreds and especially individual preferreds? Assuming you're Canadian, preferreds do give off great tax advantaged income, but it's probably more advantageous in retirement when they're held in a regular investment account. If you don't need the income preferreds can be pretty crappy. You get no real growth, your income is almost 100% dependent on interest rates, they're concentrated in financials and energy, and you carry much more risk than bonds.

As for your questions:

In Canada most preferred dividends are eligible for the dividend tax credit. So it's a tax advantaged form of income that works great in regular investment accounts. Most pay quarterly or monthly and most are from banks, insurance companies, pipelines, and utilities. Your yield is the expected annual income per unit (all dividend payments) divided by the cost per unit. The yield is the dividend yield as dividends are the only form of income that preferred shares distribute. However, the issuer bases the dividend rate and yield off the prescribed value of each preferred share unit (often $25).

Rate reset means the dividend amount is based on a prescribed interest rate. This is specified in the prospectus of the preferred share and is usually based on the LIBOR rate or the Bank of Canada overnight rate. So the prescribed dividend yield might be BoC Overnight Rate + 3.5%. So for a $25 prescribed unit value and the current 0.5% overnight rate, the yield is 4% of $25 or $1 per year. If the overnight rate goes up to 0.75%, your annual payment might be $1.0625.

The market value of each preferred share often differs from the prescribed value because of interest rates and perceived risk. There's interest rate risk, meaning if the market believes the BoC rate will drop causing the yield to drop, the value of the preferred share should go down. Vice-versa the other way (which is why preferreds generally did well towards the end of 2016). Then there's firm risk which is the market's perception of the issuer's ability to pay (which is why pipeline preferreds tanked in 2015 and did better in 2016).

Different preferreds have different rules regarding buy-backs, re-issuance, and how or if you get paid cash when the preferred share is redeemed. You basically have to read the prospectus for each class of preferred share because firms often have different rules for different classes.

If you really want to invest in preferreds after all this, I would just invest in an rate-reset preferred ETF like ZPR.TO.

Good luck!

dr_sassy

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Hi financiallypossible,
Thanks for the explanation that I can understand. I appreciate you taking the time.

Are you referring to preferred shares in a Canadian company? Benjamin Graham wrote in The Intelligent Investor that preferred shares need to be bought very cautiously and only at extreme discounts since the shareholder rights for preferred shareholders comes only after bondholders and common stock holders.

Yikes. Okay, I'll have to think about it. Thanks again.

dr_sassy

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First I would ask why preferreds and especially individual preferreds? Assuming you're Canadian, preferreds do give off great tax advantaged income, but it's probably more advantageous in retirement when they're held in a regular investment account. If you don't need the income preferreds can be pretty crappy. You get no real growth, your income is almost 100% dependent on interest rates, they're concentrated in financials and energy, and you carry much more risk than bonds.

To be honest, I like the regular income of bonds, Garth at Greater Fool likes preferred shares, and MoneySense suggested FFH. These would go in my corporate portfolio, which does get taxed, and the Ontario government is raising tax rates. I am Canadian.

I'll have to think through your explanation. Thanks so much for laying it out for me.

If you really want to invest in preferreds after all this, I would just invest in an rate-reset preferred ETF like ZPR.TO.
Good luck!
Thanks! You too.
I do have a little ZPR. Was just looking at FFH as well, which some people compare to Berkshire Hathaway.
I know it's not the party line, but I'm curious, and I do want to educate myself a little more about financials beyond a low MER.

Thanks again!

Financial.Velociraptor

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I like Fairfax common shares a lot right now.  I'd get more but I'm already at full allocation and will be getting more as they are buying one of my other insurance holdings, AWH.

I like my preferreds in JPS.  It's a closed end fund that can often be purchased at a significant discount to NAV.

dr_sassy

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I like Fairfax common shares a lot right now.  I'd get more but I'm already at full allocation and will be getting more as they are buying one of my other insurance holdings, AWH.

I like my preferreds in JPS.  It's a closed end fund that can often be purchased at a significant discount to NAV.
I just don't like the volatility of the FFH common shares. Crazytown. But it's a possibility.
Never heard of JPS. I'll look it up.
Thanks!

Financial.Velociraptor

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I just don't like the volatility of the FFH common shares. Crazytown. But it's a possibility.

Yahoo Finance reports the Beta for FFH common is (0.16).  Its negatively correlated and very poorly.  Volatility is quite low for an equity issue.  But do what lets you sleep at night.  I am personally trying to increase my allocation to income centric investments.  I'll give up some millions in my 90s to have a little security in my 40s.

RichMoose

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First I would ask why preferreds and especially individual preferreds? Assuming you're Canadian, preferreds do give off great tax advantaged income, but it's probably more advantageous in retirement when they're held in a regular investment account. If you don't need the income preferreds can be pretty crappy. You get no real growth, your income is almost 100% dependent on interest rates, they're concentrated in financials and energy, and you carry much more risk than bonds.

To be honest, I like the regular income of bonds, Garth at Greater Fool likes preferred shares, and MoneySense suggested FFH. These would go in my corporate portfolio, which does get taxed, and the Ontario government is raising tax rates. I am Canadian.

I'll have to think through your explanation. Thanks so much for laying it out for me.
Hey another blog dog! I like a lot of what Garth has to say about a lot of things, but I honestly don't understand his infatuation with preferreds. It is my observation though that "Garth's Portfolio" is structured for wealthy people who want low volatility, low growth, and tax-advantaged income. It's certainly not a growth portfolio. He also mentions preferreds and tax-advantaged income together all the time; within a corporate account you would get no tax advantage for preferreds - something to keep in mind.

If you run a professional corporation with a large account where you want to generate investment income, I would seriously talk to an accountant. This income is not eligible for the small business deduction so your tax rates will be higher than your active business income. My knowledge of corporate tax strategies is limited, but my gut says you might be way better off investing in something like HXS.TO or HXT.TO which are derivative style index funds that convert all income into capital gains which are only taxed (at 1/2 your usual rate) when sold. If your corporation and investment account will be active for a long time, a set it and forget it strategy focused on deferring capital gains could be the best option.

If you really want to invest in preferreds after all this, I would just invest in an rate-reset preferred ETF like ZPR.TO.
Good luck!
Thanks! You too.
I do have a little ZPR. Was just looking at FFH as well, which some people compare to Berkshire Hathaway.
I know it's not the party line, but I'm curious, and I do want to educate myself a little more about financials beyond a low MER.

Thanks again!
Yeah the FFH / BRK "Canada's Buffett" is a common reference that is probably less accurate now than it was 10+ years ago. Although they are both insurance companies at heart that use their float for investing, the argument for similarities gets a lot weaker after that. Buffett has focused on larger cap companies with wide moats and good cash flow. Watsa on the other hand focuses increasingly on macro-strategies and smaller cap companies that are deep value. Unlike Buffett, he likes to hold derivatives and made huge bets on the US housing crash and more recently on deflation. Some of Watsa's biggest investments are Blackberry, the Torstar Group, restaurant groups, and European banks - all could be considered deep value but not a lot of people would classify them as Buffettesque wide-moat cash flow machines.