Bank Earnings

Here is the smart way to invest in bank mutual funds. Plus, a soaring TSX cybersecurity stock

Selling mutual funds in Canada is a very lucrative business if you do it on a large scale.

This is one of the reasons why three big banks decided that their in-house financial planners would no longer sell funds from outside companies. Only internal funds will be offered, which means that some of the largest investment funds in the country will only get bigger.

Bank funds vary across the map in terms of performance – there is good, there is bad, and there is ugly. Do you have any good ones? Next, consider a better way to hold them than through a bank planner who primarily acts as a fund product salesperson. Open an account in your bank’s online brokerage division and invest in the Series D version of your funds.

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The Ontario Securities Commission has contacted the Canadian Imperial Bank of Commerce, the Royal Bank of Canada and the Toronto-Dominion Bank for further information on their plans to stop selling funds from outside companies. Whatever the end of this story, 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 deducted from the top of the fund’s returns (net returns are made public). Trailers pay advisors and their firms for services provided to clients. The D-Series backdrops have a super reduced tracking strip built in to reflect the fact that they are designed exclusively for DIY enthusiasts.

The RBC Canadian Dividend Series D has a trailing commission of 0.25 percent, while the Series A version sold by planners and branch staff has a trailing commission of 1 percent. The difference in return is a window into the importance of fees in investing. The Series D version has a 10-year annualized return as of July 31 of 8.6%, compared to the Series A version of 7.9%. The RBC website shows that for every $ 10,000 invested, you would have earned about 1 $ 400 more with the D-Series version over the past 10 years.

You don’t get advice and planning with the Series D version. If you have a great planner in the bank who has worked with you to set and achieve your financial goals, then a more expensive Series A fund can always be a good idea. good value. You forgo returns, but earn a lot through planning.

If you have a planner who acts primarily as a fund salesperson, you won’t get your money’s worth with a Series A fund. Go to Series D and treat yourself to a consultation with an impartial independent financial planner.

In a non-registered account, Series A funds can be transferred to Series D in an online brokerage account tax-free. The buy and sell order to initiate the change must be the same dollar amount, have the same trade date and the same account number.

– Rob Carrick, Globe and Mail Personal Finance Columnist

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The summary

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Ask Globe Investor

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Question: In a recent column regarding the Yield Hog Dividend Growth Portfolio model, John Heinzl failed to mention that the dividend payout ratio for Capital Power Corp. and Canadian Utilities Ltd. they have the returns they make. I think it would have been appropriate to include this information as a caveat.

Reply: 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 intervention and provide no context, often paint a very misleading picture of a company’s payout ratio.

With power producers in general, the traditional definition of payout ratio – dividends per share divided by earnings per share – is not appropriate. This is because the profits of power producers are often depressed by accounting charges such as accelerated depreciation that do not affect the company’s cash flow or its ability to pay dividends.

In the case of Capital Power, analysts use a metric called Adjusted Funds From Operations (AFFO), which is a more accurate indicator of the cash available to fund dividends. In a recent note, RBC Capital Markets analyst Maurice Choy estimated that Capital Power’s AFFO payout ratio will be 38% in 2021 and 43% in 2022. 55 percent.

On Capital Power’s website, you’ll find a recent investor presentation that provides more details on its payout ratio. Remember that in July, Capital Power increased its dividend by 6.8%, its eighth consecutive annual increase. If the company was really paying more than it could afford, the shortfall would probably have caught up with the company already.

With regulated utilities, analysts often use a modified version of earnings – called “adjusted earnings” – to determine the payout ratio. In the case of Canadian Utilities, earnings are adjusted for one-time gains and losses, the timing of revenues and expenses from its regulated activities, asset impairment charges and other items that do not result from the operations. daily.

Mark Jarvi, analyst at CIBC World Markets, calculates Canadian Utilities’ dividend payout ratio – based on adjusted earnings – at around 82% for 2021. It’s pretty high, but it’s not huge. In a recent memo, Mr Jarvi said he expects the company to continue to generate annual dividend growth – as it has for 49 consecutive years – albeit at a slower pace than ‘previously. Canadian Utilities’ most recent increase in January was only 1%.

I’ll say it again: don’t take payout ratios on financial websites as the last word on dividend sustainability. Consider them as the starting point for further research.

–John Heinzl

What’s new in the coming days

Ex-dividend dates? Save dates? Pay dates? What do they mean? John Heinzl will be here with answers.

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