I'll take a shot at answering your questions.
queerasmoi wrote:My understanding is that the split-share corporation owns a basket of securities
There are many different types of split-share corps. Some own a basket of underlying stocks (e.g. financial stocks), and others owns a single underlying stock (typically a stable dividends payer such as a bank stock).
effectively, it behaves as if the common shares owned the entire basket on a margin loan (5.25%, it would seem, in most cases) from the preferred side. The preferred shareholders receive dividends equivalent to those interest payments, and their principal is backed by the equity in the common shares (as long as the common shares still have value
The split corp (which includes the preferred and capital shares) owns the underlying portfolio of stocks. There is no margin loan from the capital shareholders to the preferred shareholders. The spit corp usually obtains it's revenue from i) the dividends generated by the underling stocks, ii) selling covered calls on the underlying stocks, and iii) capital appreciation of the underlying stocks. The split corp revenues are distributed to the preferred and capital shareholders. Preferred shareholders usually receive a fixed dividend (5.25% is a typical amount for recent split corp issues). Preferred shares have priority over the capital shares in receiving dividends, but preferreds don't share in any dividend increases or capital gains from the underlying portfolio.
The principal of the split corp is backed by the equity of the underlying stocks. On the wind-up date of the split corp, the underling portfolio of stocks are sold, and preferred shareholders have first priority to be paid back the original issue price of the preferred shares. The capital shareholders get whatever is left over after the preferred shareholders have been paid out.
queerasmoi wrote:What should I be aware / afraid of when it comes to pref split shares?
A few key points:
- Some pref split shares can be redeemed by the split corp prior to the maturity date. You need to read the prospectus to determine if there is the potential for a forced early redemption. You need to understand the concept of Yield To Worst.
- Pref split shares are very thinly traded, so you should never use a market order to buy or sell.
- You need to be aware of the rating (from S&P or DBRS) of the pref split.
queerasmoi wrote:Where do they fit on the spectrum of equity-to-fixed income? My instinct is "safer principal than corporate preferreds, still riskier than 'real' fixed-income"
queerasmoi wrote:Wondering if they'd be a good complement to the cash and bonds section of my little portfolio.
I consider split prefs as fixed income. Split prefs are somewhat similar to short term bonds, in that they have a fixed maturity date and pay a fixed distribution. I thinks split prefs are a good alternative if you need to hold fixed income in a non-registered account.