Dividend 15 Split Corp II: A Steady Income Play Amid Risks?

The declaration of a CAD 0.10 monthly dividend for Class A shares of Dividend 15 Split Corp II on May 21, 2025, underscores the fund's commitment to steady income generation. Yet, investors must weigh this allure against looming risks tied to a maturing portfolio, declining net asset value (NAV), and macroeconomic uncertainties. This analysis evaluates the sustainability of distributions, the efficacy of downside protections for preferred shareholders, and strategic opportunities amid challenges.

The Dividend Machine: A History of Stability

Dividend 15 Split Corp II has maintained its CAD 0.10 monthly payout for Class A shares since at least 2023, with an annualized yield of 2.0% based on its current share price of CAD 5.97. This consistency stems from its portfolio of 15 high-quality Canadian dividend-paying stocks, including banks (Bank of Montreal, Royal Bank of Canada) and utilities (Enbridge, TC Energy). The defensive tilt of these sectors has historically insulated the fund from volatility, supporting stable cash flows.

Downside Protection: A Mixed Picture for Preferred Shareholders

Preferred shareholders receive CAD 0.05833 monthly (7.0% annually as of December 2024), but their position faces trade-offs. The fund's NAV test—a critical safeguard—requires that the NAV per unit (combining one Preferred and one Class A share) remain above CAD 25. As of March 2025, downside protection for Preferred holders stood at 37.3%, meaning their principal is shielded unless NAV drops below 62.7% of face value.

However, the Preferred dividend hike to 7.0% reduced the dividend coverage ratio to 0.8x, relying increasingly on capital gains and option-writing strategies (like covered calls) to meet obligations. Morningstar DBRS's Pfd-3 rating acknowledges this strain, projecting a 2.4% annual NAV grind over five years unless mitigated by rising asset values.

Extension to 2029: A Double-Edged Sword

The fund's termination date extension to December 2029 offers clarity for Preferred shareholders, who will receive face value upon maturity. Class A shareholders, however, face residual uncertainty, as their proceeds depend on NAV at termination. While this extension stabilizes expectations, it also prolongs exposure to risks like rising interest rates and potential NAV erosion.

The Yield Advantage vs. Macro Risks

The fund's 2.0% yield on Class A shares exceeds Canada's 10-year bond yield (~1.8%) and the S&P 500's dividend yield (~1.2%), making it an income magnet. Yet, macroeconomic headwinds loom large:
- Interest Rate Pressures: Higher borrowing costs could strain banks' net interest margins, dampening dividend payouts.
- Economic Softening: A slowdown could pressure utilities' earnings if demand weakens.
- NAV Declines: The 2.4% annual grind projection, if realized, could erode the fund's value, threatening its ability to sustain distributions.

Strategic Opportunities for Income Seekers

Despite these risks, Dividend 15 Split Corp II remains a compelling play for investors prioritizing stability. Key considerations:
1. Valuation: Trading at CAD 5.97—10.9% below its 52-week high—its shares may offer a contrarian entry point.
2. Defensive Portfolio: Exposure to banks and utilities provides resilience in downturns.
3. Preferred Share Appeal: Their 7.0% yield, coupled with NAV tests and downside protection, makes them a higher-priority hold than Class A shares for risk-averse investors.

Conclusion: A Cautionary Buy

Dividend 15 Split Corp II's CAD 0.10 dividend declaration reflects a strategy designed to attract income-focused investors. While its defensive portfolio and yield edge are strengths, the fund's reliance on capital gains, NAV erosion risks, and macroeconomic uncertainty demand caution.

Investment Advice:
- Hold Preferred Shares: Their superior yield and downside safeguards make them a safer bet, provided investors accept a potential 2.4% annual NAV grind.
- Monitor NAV Closely: Track the fund's NAV relative to the CAD 25 threshold; a breach would halt Class A distributions, triggering volatility.
- Consider Timing: The May 30 record date offers a final entry point for June's CAD 0.10 payout, but avoid overpaying given the current discount to its 52-week high.

In a low-yield world, Dividend 15 Split Corp II remains a viable income tool—if investors accept its risks as the cost of steady returns.

Disclaimer: Past performance does not guarantee future results. Always conduct thorough due diligence and consider consulting a financial advisor.