Selling mutual funds in Canada is a very lucrative business if you do it on a massive scale.
That’s one of the reasons why three big banks have decided that their in-house financial planners will no longer sell funds from outside firms. Only in-house funds will be offered, which means some of the country’s largest investment funds will only get bigger.
Bank funds range all over the map in performance – there’s good, there’s bad and there’s ugly. Got some of the good ones? Then consider a better way to hold them than through a bank planner who acts primarily as a seller of fund products. Open an account at your bank’s online brokerage division and invest in the Series D version of your funds.
The Ontario Securities Commission has contacted Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto-Dominion Bank for more information about their plans to stop selling funds from outside firms. Regardless of which way this story ends, Series D funds are worth a look.
Bank planners sell the Series A version of funds, with a full trailing commission built into the fees that are taken off the top of fund returns (net returns are publicly reported). Trailers compensate advisers and their firms for services provided to clients. Series D funds have a much-reduced trailer built in to reflect the fact that they’re designed exclusively for the do-it-yourself crowd.
RBC Canadian Dividend Series D has a trailing commission of 0.25 per cent, while the Series A version sold by planners and branch staff has a trailer of 1 per cent. The difference in returns is a window on why fees matter in investing. The Series D version has a 10-year annualized return to July 31 of 8.6 per cent, compared with 7.9 per cent for the Series A version. RBC’s own website shows that, on $10,000 invested, you’d have made an extra $1,400 or so with the Series D version over the past 10 years.
You don’t get advice and planning with the Series D version. If you have a great planner at the bank who has worked with you to set and achieve your financial goals, then a more expensive Series A fund can still be a good value. You give up returns, but gain a lot through planning.
If you have a planner who acts mainly as a fund seller, then you’re not getting your money’s worth from a Series A fund. Switch to Series D and buy yourself a consultation with an unbiased independent financial planner.
In a non-registered account, Series A funds can be switched into Series D in an online brokerage account without tax implications. The buy and sell order to initiate the switch must be the same dollar amounts, have the same transaction date and the same account number.
-- Rob Carrick, Globe and Mail personal finance columnist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Stocks to ponder
Magnet Forensics Inc. (MAGT-T) This newly listed stock has more than doubled in value in just a few months but lately there’s been some profit-taking. Waterloo, Ont.-based Magnet Forensics’ cloud-based investigation software platform analyzes data from digital sources including computers, cell phones, and servers, gathering evidence in crimes and cybercrimes. As Jennifer Dowty tells us in this profile of the company, all four analysts who follow the stock rate it as a buy.
Why investors’ ‘wall of worry’ is growing more difficult to ignore
Markets, says the old adage, are always climbing a wall of worry. They’ve been doing it very successfully since April of 2020 with all the major North American indexes hitting new highs in the months following the March pandemic crash. The big question is: How long can it last? As summer winds down and autumn approaches, that wall is looking increasingly difficult. Gordon Pape reviews some of the bricks that are making it higher and harder than ever.
Bonds ‘boring’ no longer as unpredictability returns
Erratic and volatile, with positioning swinging from one extreme to another: a new norm is taking hold in the world’s biggest debt markets which for years saw activity crushed by the hefty presence of central banks. Bond-buying stimulus remains a powerful downward force on borrowing costs, with the balance sheets of six major central banks amounting to almost $30 trillion, from under $10 trillion in 2008. But unusually sharp swings in sovereign bond yields this year suggest that low volatility, something investors have become accustomed to, cannot be taken for granted. Dhara Ranasinghe of Reuters reports.
How Wall Street’s hottest dealmaking trend fizzled
CPPIB-backed Sportradar was supposed to go public through a SPAC valued at US$10 billion. Instead it went public this week through a traditional initial public offering that valued the company at just $8 billion. The reason: The SPAC market deteriorated rapidly over the summer. The bubble, it seems, has burst. Anirban Sen and Krystal Hu of Reuters report.
What else we’re reading
Most stocks are duds
Larry Swedroe, the chief research officer at Buckingham Strategic Wealth and the author of numerous books on investing, details how the majority of individual common stocks have generated long-run shareholder losses relative to a Treasury-bill benchmark. Keep in mind that bonds had been in a bull market for many years.
Number Cruncher: Six dividend-paying gold stocks that can shine over the long term
Friday’s Insider Report: Trading action in five dividend stocks, including a $34-million purchase
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.
Ask Globe Investor
Question: In a recent column regarding the model Yield Hog Dividend Growth Portfolio, John Heinzl failed to mention that the dividend payout ratio for Capital Power Corp. and Canadian Utilities Ltd. are 123 per cent and 173 per cent, respectively, which is the only reason they have the yields that they do. I think it would have been appropriate to include this information as a caveat.
Answer: I’ve said it before and I’ll say it again: Don’t rely on the payout ratios you see on financial websites to gauge the sustainability of a company’s dividend. These numbers are generated automatically and, because they lack human input and provide no context, often paint a highly misleading picture of a company’s payout ratio.
With power producers generally, the traditional definition of payout ratio – dividends per share divided by earnings per share – isn’t appropriate. That’s because power producer earnings are often depressed by accounting charges such as accelerated depreciation that don’t affect the company’s cash flow or its ability to pay dividends.
In Capital Power’s case, analysts use a measure called adjusted funds from operations (AFFO), which is a more accurate indicator of the cash available to fund dividends. In a recent note, analyst Maurice Choy of RBC Capital Markets estimated that Capital Power’s AFFO payout ratio will be 38 per cent in 2021 and 43 per cent in 2022. Both are below the company’s long-term AFFO payout target range of 45 per cent to 55 per cent.
On Capital Power’s website, you’ll find a recent investor presentation that provides more detail about its payout ratio. Keep in mind that, in July, Capital Power raised its dividend by 6.8 per cent – its eighth consecutive annual increase. If the company were really paying out more than it could afford, the shortfall would have likely caught up with the company by now.
With regulated utilities, analysts often use a modified version of earnings – called “adjusted earnings” – to determine the payout ratio. In Canadian Utilities’ case, earnings are adjusted for one-time gains and losses, the timing of revenues and expenses in its regulated operations, asset impairment charges and other items that aren’t the result of day-to-day operations.
Mark Jarvi, an analyst with CIBC World Markets, calculates Canadian Utilities’ dividend payout ratio – based on adjusted earnings – at about 82 per cent for 2021. That’s on the high side, but it’s not egregious. In a recent note, Mr. Jarvi said he expects the company will continue to deliver annual dividend growth – as it has done for 49 consecutive years – although at a slower pace than previously. Canadian Utilities’ most recent increase, in January, was just 1 per cent.
I’ll say it one more time: Don’t take the payout ratios on financial websites as the last word on dividend sustainability. Treat them as the starting point for further research.
What’s up in the days ahead
Ex-dividend dates? Record dates? Pay dates? What do they all mean? John Heinzl will be here with answers.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
Compiled by Globe Investor Staff