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I'm new to ETFs and such and am trying to learn as much as possible quickly. I came across this fund today that seems like magic to me: DGS.PR.A (TSE) The fund seems to maintain a $10 value (except for 2008) and pays out just over 5% via quarterly dividends. Can someone explain the "magic" behind the curtain? How is this static nature maintained when the assets in the fund go up and down?

Here's the funds information: http://www.bromptongroup.com/index.php/funds/fund/dgs/overview (looking at the preferred shares one)

fund price

year-by-year returns

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If you look at the Brompton Group website you can see that the preferred shares have a redemption price of $10.05, this means Brompton Group can call (buy back) these shares from the shareholders anytime for $10.05. As you might imagine, this creates considerable pressure to keep the price around that point. Price gets too high, the more risk-averse shareholders sell out as they run the risk of losing money if the shares get called (also the dividend yield would be decreased). Price too low, more speculative investors will buy up the shares in the hope the company might call them in the near future.

  • So, they can buy back the shares at their whim, the investor has no say? – Tim Tisdall Apr 10 '17 at 13:37
  • Since the underlying equity is likely doing better than that 5% yield and the shares are being fixed in price... Doesn't it seem like the end game is to buy up all the shares in the end and make a huge profit? I guess it's very similar to a savings account where you get interest and the bank is free to make as much as they can. – Tim Tisdall Apr 10 '17 at 13:44
  • @TimTisdall I'm no expert on preferred shares but as far a I know the investors have no choice when the company calls the shares, though there is usually a preset date before which the company cannot recall the shares. What exactly do you mean with " buy up all the shares in the end and make a huge profit"? Looking at your chart the shares are trading slightly above the redemption price so if the company calls them you would actually be incurring a small loss. – Koen vd H Apr 10 '17 at 15:27
  • Comments don't have much room... I meant that Brompton brings in investment capital and earns money off it but pays out 5% yield in dividends. If the equity does better than 5% then they effectively can pocket that when they call in the shares because they can call them in at that fixed price regardless of the value of the assets held. So, I meant that Brompton would be the one profiting well in the end. – Tim Tisdall Apr 10 '17 at 16:13
  • @TimTisdall Brompton wouldn't be making extra money if the shares traded above the call price if that's what you're thinking. It's kind of the same idea as when bonds mature, if the bond was trading at like 110% of its par value the investors holding the bond are losing 10% but the company does not earn this difference. – Koen vd H Apr 13 '17 at 8:57
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Dividend funds tend to focus on creating cash income, distributed in the form of dividends. So high-dividend-paying ETF's tend to funnel their returns into dividends which limits the cost of the fund. The fund's value can still increase or decrease, however, when dividends are increased or cut or when its assets rise or fall.

Preferred shares to a fund, as the ones you are mentioning, often have get preference over common stock (the class A stock that I mistakenly was looking at). This means that they will have dividends paid before common stock does, making these shares more stable. They can also receive higher dividends but lack voting rights.

  • Did you look at the chart? It's nearly flat except for 2008-2009. I've seen other dividend funds and their value seems to reflect the underlying funds. The TSX had a significant drop in 2015 but there's seemingly nothing reflected in this fund. – Tim Tisdall Mar 10 '17 at 14:22
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    yes, I edited your question to include the chart. The fund is steady, but not extraordinarily so . – Nosrac Mar 10 '17 at 14:29
  • You put the chart for the Class A fund and I'm looking at the Preferred shares one. – Tim Tisdall Mar 10 '17 at 14:38
  • Good point. I'll edit my answer – Nosrac Mar 10 '17 at 14:46
  • Is this relatively static nature common to preferred shares? Is what I'm seeing a property of the underlying shares or is there something else here? (my knowledge of preferred shares is sorely lacking) – Tim Tisdall Mar 10 '17 at 14:54

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