The era of income trusts is passing. But the Canadian government didn’t legislate away investors’ desire for dividends, nor did they make illegal the desire and ability of trusts’ management teams to provide them.

The latest evidence is Conservative Holding Bird Construction Income Fund’s (TSX: BDT-U, OTC: BIRDF) announcement that it will convert to a corporation by the end of 2010 while holding its annual dividend rate of CAD1.80 a share steady.

Bird is the 23rd distribution-paying Canadian income trust to announce a no-cut conversion. That it had the financial power to absorb new taxes was certainly no secret. Fourth-quarter earnings per unit again covered the payout by a better than 2-to-1 margin, despite a 15.3 percent decline in construction revenue due to the weak economy.

Order backlog, the best gauge of future revenue, was steady at CAD901 million. Meanwhile, the company increased its working capital by 46 percent in 2009, the best measure of financial stability for the largely debt-free construction firm.

Overall, the results showed Bird has successfully navigated the worst economic downturn in decades. Not only has it managed to hold the majority of its business with private industry. But it has also replaced much of what it had lost to hard times with new infrastructure deals signed with the federal and provincial governments, as well as other agencies. That enabled Bird to post record financial results for full-year 2009 and, now that the Canadian economy is picking up steam, it’s in great shape to rev up sales and profits further still.

That’s an ideal platform from which to convert from a trust to a corporation. And it augurs further robust returns from Bird in the months ahead. We’ve already realized some substantial gains with this trust since adding it to the Portfolio in late 2008. The price of the units, however, is still well below the mid-2008 high. That suggests a lot of upside ahead for Canada’s dominant construction pure play. Buy Bird Construction Income Fund up to USD33.

Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF) has also announced fourth-quarter results. The producer of hydro and wind power has already announced its conversion to a corporation, which involves a merger with its operator/affiliate Innergex Renewable Energy (TSX: INE, OTC: INGXF) and a net 15 percent reduction in the company’s distribution when the deal is completed.

The trust’s full-year payout ratio came in at 90 percent for 2009, as cost controls offset less favorable weather conditions for output at the hydro and wind facilities. Work by giant off-taker customer Hydro-Quebec on its transmission lines, for example, idled three hydro plants and a wind farm. That’s set to reverse in coming quarters, pushing up cash flow and pulling down the payout ratio.

As I explained in the February 2010 High Yield of the Month, Innergex’ units will be exchanged for 1.46 common stock shares of a new corporation, shortly following a unitholder vote at a special meeting scheduled for March 26. In my view, the new company will have dramatically enhanced growth prospects, thanks to a wealth of potential wind and hydro projects whose output must by law by purchased at good prices by Canadian government entities and utilities.

That will provide plenty of fuel for dividend increases in future years, as well as share price growth. We’ve already realized a tidy gain of around 25 percent since the company made its conversion announcement on February 1, even in an environment where investors have largely soured on renewable energy investments. That’s pretty good reason to expect substantial gains ahead in addition to the safe and generous dividend. Soon-to-forget Innergex Power Income Fund remains a buy up to USD12 for those who haven’t already bought in.

A New Investment Class

Cut-less or not, conversions continue to be universally bullish for income trusts this year. All the market requires, it seems, is just clarification of post-conversion dividends.

Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF), for example, fell sharply for two days after it announced a larger-than-expected 34.7 percent post-conversion dividend cut. The units, however, have since rebounded even more dramatically and now stand nearly 5 percent above their pre-announcement price on March 2.

That bodes well for the remaining trust conversions, the vast majority of which will take place between now and the end of 2010. But the really bullish implications are for the post-conversion era, when trusts are no longer trusts but the leaders of a new breed of high-yielding equity never before seen.

These companies pay taxes–but also outsized dividends that dwarf those of the typical US corporation. Rather than enrich themselves with bloated salaries and perks, the managers’ interests are firmly attached to those of ordinary shareholders. And as the growing wave of low and no-cut conversions proves, they’ve discovered it’s possible to pay out big and grow their businesses by efficient use of capital.

It’s certainly not rocket science that investors need yield more than ever before. And these companies have realized they can harness that demand to issue low-cost equity that can fund everything from acquisitions to asset construction. Asset growth, in turn, means cash flow growth, which means a greater ability to pay dividends.

Dividends are paid not from traditional earnings per share but from distributable cash flow after taxes and capital spending. Dividends are lower than they could have been had Canadian trusts maintained their favorable tax status. And yields are going to be lower than they’ve been in previous years, mainly because investors won’t require a yield premium due to misplaced fears about 2011.

Yields will still be multiples higher, however, than the kind of conventional stocks and bonds most advisors try to shove into clients’ accounts. They’ll also be paid in Canadian dollars, a currency that should continue to appreciate against the US dollar and also which provides protection from future inflation. That’s because it tracks the price of energy, which is certain to be at the root of any inflation swing.

Finally, US investors who hold these investments in IRAs and other tax-deferred retirement accounts are in line for an effective 17.6 percent dividend increase. While we continue to believe dividends paid by Canadian trusts and corporations should already be exempt from the 15 percent withholding of dividends under the Fifth Protocol of the US-Canada Tax Treaty, Canada looks set to continue withholding until the trusts convert to corporations, and start paying taxes in Canada.

Whatever the case, however, by the end of this year, US investors’ IRAs will no longer be withheld. That means 15 cents per dollar of dividends added back to their accounts, an effective 17.6 percent dividend increase for owners of converting trusts.

Ultimately, what we’re talking about here is a new class of dividend-paying stocks paying rising yields from a base of between 6 and 12 percent. And based on performance of US equivalents, the former oil and gas producer trusts will pay out in the teens when energy prices perk up again.

Those yields will rise further for US investors whenever the Canadian dollar gains ground. Unlike dividends paid by any other foreign stock or bond, they’ll be exempt from cross-border withholding. And there will be nothing more complicated than a 1099 to be filed, even for investors who hold them outside of IRAs.

Those who hold these investments through their transition from trusts to corporations will realize substantial capital gains, very likely in the neighborhood of 60 percent. But even those who come later to the party will be buying first and foremost into strong businesses with powerful growth prospects, as management continues to take advantage of opportunities and the Canadian economy surges forward.

Finally, investors can rest assured that these are companies that have proven themselves in the worst possible conditions over the past several years. Not only were they stress-tested by the economy and credit markets. But they also thrived despite the Canadian government’s restrictions on how they raised capital.

That’s something no US company had to go through. Now they’re set to benefit from what will soon be the lowest corporate tax rates in the developed world. Alberta-based oil and gas producers, meanwhile, will get a double bonus, as the provincial government rolls back royalty rates to get business going again.

It all adds up to a windfall gains this year and hefty yields and total returns thereafter–all with much less risk than investing in most US sectors. That’s all the reason anyone should need to buy Canada this year, particularly if you haven’t already.