Q&A With Gordon Pape: Is This Stock’s Dividend Too Good to be True?

Q&A Money

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In this Q&A, financial expert Gordon Pape gives his opinion on Premium Income Corp A (PIC.A-T), a stock that is paying a dividend of almost 20 per cent.


Q – My daughter is in grade 11, and I’ve been gradually shifting her RESP holdings to GICs as she approaches university. 

I’m also using ZWU and ENB as relatively safe choices, paying decent dividends and have stop limit orders on them so that I can’t lose the initial investment. 

I now need to move more money out of active stock trading and am confused by Premium Income Corp A (PIC.A-T). It is currently paying a whopping dividend of almost 20 per cent. Generally, I see big yield as red a flag, because they usually happen when a stock drops. But this stock seems to have been paying such a dividend for a long time, and the stock is rising. Too good to be true? Could you address the sustainability of its dividend yield? – Mel B.

A – Premium Income Corp. is a split-share security, managed by Mulvilhill Capital Management. It invests in the shares of Canada’s Big Six banks, splitting them into common and preferred. Mulvihill charges a management fee of 0.9 per cent.

The preferred version trades under the symbol PIC.PR.A. It’s the first security to receive any dividends paid by the banks, to a limit of $0.215625 per quarter, or $0.8625 annually. The market price of the preferreds may occasionally fall when bank stocks falter, but generally they trade in the $15 range, which was the original issue price. There is little upside, but little risk either. The dividend is secure. 

Excess payouts accrue to Premium’s A shares, which trade in Toronto as PIC.A. They benefit from the growth in the value of the underlying bank shares and any increase in the dividend payouts from those shares. 

According to the Mulvihill website, the A shares currently pay a little over $0.20 per quarter ($0.81 annually), to yield 19.4 per cent based on the price of $4.17 at the time of writing. The distribution looks safe, but the A shares can be highly volatile. The original issue price was $10, but during the past year they have traded between $3.29 and $6.24. 

It appears the dividend yield is sustainable for both classes of shares. But the volatility of the A shares makes them unsuitable for an RESP, especially if the money will be needed within a few years. – G.P.

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Gordon Pape