Morningstar DBRS Confirms Dividend Growth Split Corp.'s Preferred Shares at Pfd-3 (low)

DBRS Limited (Morningstar DBRS) confirmed the credit rating on the Preferred Shares issued by Dividend Growth Split Corp. (the Company) at Pfd-3 (low). The Company invests in a portfolio consisting primarily of equity securities of Canadian dividend growth companies (the Portfolio). In addition, the Company may hold, at Brompton Funds Limited's (the Manager) discretion, up to 20% of the total assets of the Portfolio directly in global dividend growth companies or indirectly through exchange-traded funds for diversification and improved return potential. As of December 31, 2024, the Portfolio was invested in 36 equity securities across 11 sectors and one exchange¿traded fund investment, including financials (32.4%), energy (18.4%), industrials (9.1%), investment funds (8.8%), consumer discretionary (7.5%), consumer staples (5.8%), materials (5.5%), information technology (5.0%), utilities(2.4%), real estate (2.1%), healthcare (1.5%) and communication services (1.0%). To qualify for inclusion in the Portfolio, at the time of investment, each dividend growth company included in the Portfolio must have (1) a market capitalization of at least $2.0 billion and (2) a history of dividend growth or, in the Manager's view, have a high potential for future dividend growth.

The current issued and outstanding Preferred shares have a maturity date of August 30, 2029, following an extension of the previous maturity date of September 27, 2024.

Dividends received from the portfolio are used to pay fixed cumulative quarterly dividends equal to $0.675 per annum (p.a.) to each Preferred Shareholder, yielding 6.75% on the original issue price of $10.0. Holders of Class A Shares receive monthly distributions targeted at $1.20 p.a. The net asset value (NAV) test in place prevents any distributions to the Class A Shares if the Company's NAV falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. The Company's NAV has stayed above $15.0 during 2024, resulting in the Company declaring cash distributions of $1.20 per Class A Share during the year 2024.

As of May 29, 2025, the downside protection stood at 41.9%, compared with 37.1% as of May 31, 2024. The dividend coverage declined to 0.5x from 0.6x a year ago, driven in part by the increase in the distribution rate paid to Preferred shareholders. The dividend coverage below 1.0x indicates that the current dividend income earned by the Company is not enough to fully cover the Company's targeted distributions on the Preferred Shares, which increases the reliance on the Manager to generate a high yield to meet distributions without having to liquidate portfolio securities. To supplement the Portfolio income, the Company may engage in securities lending, as long as, the aggregate market value of all securities loaned by the Company does not exceed 50% of the assets of the Company. The Company may also write covered call and put options on all or a portion of the shares held in the Portfolio. Without considering the capital appreciation potential or any source of income other than the dividends earned by the portfolio, the Preferred Share distributions together with the current distributions on the Class A Shares will create a projected grind on the NAV of the Portfolio of approximately 4.8% per year over the remaining term.

Considering the amount of downside protection available to holders of the Preferred Shares, the Portfolio diversification, the dividend coverage, the term extension and the expected grind, Morningstar DBRS confirmed the credit rating on the Preferred Shares at Pfd-3 (low).

The main constraints to the credit rating are as follows:

(1) Volatility of price and changes in the dividend policies of the underlying issuers may result in significant reductions in the Preferred Shares' dividend coverage or downside protection from time to time.

(2) Dividends and interest received on the Portfolio are currently unable to fully cover distributions on the Preferred Shares.

(3) The Company relies on the Portfolio manager to generate additional income, through security lending or option writing, to meet distributions and other trust expenses without having to liquidate the portfolio's securities.

(4) Stated monthly distributions on the Class A Shares will likely create a grind on the portfolio. This risk is mitigated by an asset coverage test of 1.5x that ensures sufficient levels of downside protection to the holders of the Preferred Shares.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology applicable to the credit rating is

Rating Canadian Split Share Companies and Trusts (June 21, 2024) https://dbrs.morningstar.com/research/434794.

Other methodologies referenced in this transaction are listed at the end of this press release.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

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Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/410863.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.