This week Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF) halved its distribution to a monthly rate of CAD0.054. The first payment at the reduced rate will be October 30 for shareholders of record September 30.

As I’ve reported previously in Canadian Edge, Consumers’ ability to maintain its prior distribution after Jan. 1, 2011 has depended for some time on the prospects for its Stratacon sub-metering business. These have been in doubt since March. That’s when the Ontario Energy Board (OEB) unexpectedly placed severe restrictions on sub-metering in the province, triggering losses and driving Consumers’ overall dividend payout ratio well over 100 percent.

On August 13 the OEB amended its initial decision, allowing Consumers’ to resume activity. There were new caveats, however. In the Ontario apartment market segment–half of Stratacon’s business–Stratacon is now required to gain tenants’ written permission to install and operate sub-meters. This requirement is retroactive, meaning Consumers’ must secure permission to keep existing customers, as well as to secure new business.

The upshot is the sub-metering business is still potentially very profitable. But it’s not going to generate anything close to the cash needed to cover a post-2011 dividend.

Moreover, Consumers’ is now paying higher interest costs as the result of purchasing Stratacon. It’s going to require substantially more upfront capital to grow that business. And Consumers’ core waterheater rental business has seen higher attrition rates, mandating more capital investment there as well.

The distribution cut will provide an additional CAD31.8 million annually, which should be more than enough to cover these cash needs. In fact, management stated in this week’s conference call that the new rate is “sustainable” after the new taxes kick in Jan. 1, 2011. And if it’s successful on the business side, future dividend increases are likely going forward, possibly as soon as 2011.

Consumers’ share price has ticked down a bit since the cut was announced this week. But its yield has been well over 20 percent for some time. That’s a pretty clear sign that the potential for a cut has been well baked into the share price.

The lower rate should hold going forward and the saved cash will protect Consumers’ from any future problems in the sub-metering business. On the other hand, given the drastic nature of this move, I want to see some positive numbers before giving the all clear and upgrading Consumers’ to a buy again.

The next benchmark will be third quarter earnings, which should be announced at the beginning of November. Until that time, those who own Consumers’ Waterheater Income Fund should continue to hold on and collect the still substantial dividend. Would-be buyers of this still steady business should await further developments.

The other key development in the CE Portfolio this week concerns Series S-1 Income Fund (TSX: SRC-U, OTC: SRIUF). The closed-end fund’s proposed merger with other Citadel group funds is still slated for a vote on September 30. Most investors and their brokers by now have been mailed proxies soliciting their vote.

My advice for the past several months has been to vote for the deal, which will create a larger closed-end fund with better economies of scale, and therefore presumably lower expenses per share.

Investors should also have been notified of a rival proposal from Blue Ribbon Fund Management, which has charged the Citadel merger will result in a fund with much higher expenses and potential conflicts of interest. And it has gained some support in the Canadian investment community.

The chief point of contention here, however, seems to be who will run the combined fund once the mergers are completed. In the final analysis, that matters a lot less to us than how the Canadian markets do.

And in any case, when you buy a fund, you’re relying on the management. Series S-1 Income’s current management has done a good job over the years. But if the post-merger management doesn’t, we’ll be swapping out for another fund.

That’s very different from buying individual trusts, which boils down to assessing the risk of a particular business. And it’s the main reason I prefer investors own individual trusts and high-yielding stocks rather than mutual funds in general.