Split Shares – Your Choice: More Price Participation or More Yield?

A new investment vehicle which has been very popular of late is what’s known as a “Split Share”.  These split shares are created by taking a common share of a company that pays a regular dividend and then “splitting” the one share into two distinct types of shares: 1) The Capital Share and 2) The Preferred Share.

Let’s take a hypothetical company and explain using an example:

Company ABC’s common shares are trading at $100 per share and pay a dividend of $4 per year (which is a 4% dividend yield). If you wanted to create a split share you would split that common share into two shares as follows: The Capital Share is $50 and pays no dividend at all; The Preferred Share is $50 and pays $4 per year in dividends.

What you have to realize is that the Capital Share, while stripped of it’s dividend, gets to appreciate in the price movement of the underlying common stock all to itself and that the Preferred Share gets to keep a nice fat dividend all to itself. So if the value of the underlying common share goes from $100 to $110, then the Capital Share goes from $50 to $60.  $10 is 10% of $100, but it is 20% of $50.  Remember, the Capital Share gets all the price movement of the underlying common stock.

The Preferred Share on the other hand, doesn’t move if the Common Share goes up by $10, but since it is a $50 share which gets the full dividend of the $100 common share of $4, it’s yield is twice that of a regular common share – it has an 8% yield.

In theory, it would be pointless to own an equal amount of shares of both the Capital Share and the Preferred Share since you would be left with 1 full common share (which is what we began with). In reality, the fees and engineering required to split a share could decrease performance such that holding one of each would actually give you a slightly lower return than just one original share.

I should point out that I used round numbers for the purpose of explaining the mechanics of the Split Share concept, in most cases the actual levering effects are not always that simple. For example, a Capital Share might go up by $1.50 if the underlying common stock goes up by $1.  That’s still a higher gain than with the common share alone, but not quite a 2:1 effect.  Also, please note that when the price of the underlying common stock goes down – the price of the Capital Share goes down even more.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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