Sustainable businesses pay big, reliable dividends. Shaky businesses offer no such assurance and a constant risk of disaster.

Sustainability is tough to pull off this year, with the North American economy and capital markets hit by severe stress tests. Nonetheless, both of this month’s High Yields of the Month are succeeding: Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) and Consumers Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF).

I’ve had my eye on Consumers for some time. Now with the trust yielding more than 13 percent, I’m adding its steady cash generation to the Conservative Holdings.

The company’s core business of renting water heaters in Ontario features utility-like stability. Meanwhile, management has been able to consistently grow revenue without piling on risk. Second quarter earnings provided another demonstration of this successful formula, as a 5.5 percent bump up in revenue triggered a 13.1 percent increase in distributable cash flow from operations. The trust’s payout ratio—which includes maintenance capital expenditures of roughly 40 to 50 percent of cash flow—fell to just 87.1 percent.

Covering capital costs and distributions with operating cash flow means the trust has cash reserves to fund expansion and cut debt. The trust cut second quarter interest expense by 14.2 percent from last year’s levels. This summer, management made two major acquisitions: a smaller water-heater renter, boosting its customer base by another 5,960 accounts, and “smart metering” company Stratacon. The latter has the potential to leverage Consumers’ expertise and take its operations truly national for the first time.

In the US, most people own their own water heaters. Not so in Canada, where the harsher climate makes them arguably even more critical. Consumers is focused in Ontario, where it has roughly a 50 percent market share. Units are serviced by a division of global energy giant Centrica under a long-term revenue-sharing deal.

The heaters are considered of superior quality to alternatives available for purchase in stores, evidenced by rental contract renewal rates upwards of 90 percent. Renewals are further enhanced by high service levels and modest monthly payments, which also give the trust the ability to push through rent increases. Rates were boosted an average of 3.9 percent in 2008, 2.5 percent in 2007 and 3.5 percent in 2006.

The life span of the typical gas water heater is about 16 years, and the average age of Consumers’ fleet is roughly half that. That provides plenty of economic life. Maintenance capital expenditures—though always a hefty share of the budget—have shown to be extremely steady and predictable. And with the rental market still highly fragmented, there are numerous opportunities to make profitable acquisitions.

Stratacon’s smart meter business has many similarities to the water heater operation. These meters allow efficient monitoring and control electricity, heat and water consumption. It also operates under long-term contracts—typically more than 10 years. Renewal rates tend to be very high as well, as are margins. And the market continues to grow by leaps and bounds, as consumers and businesses strive to be more resource-efficient.

Stratacon’s focus is basically on multi-residential rental properties, 70 percent of which are in Consumers’ water heater territory. The company installs meters for free in exchange for signing long-term contracts, which are typically signed with dwelling owners and hold even when there’s a change in tenants.

The now-completed purchase of Stratacon is expected to be accretive to earnings over the next 12 months. And management expects to pair it with other acquisitions and expansion, particularly in western Canada.

As the graph shows, Consumers shares have dropped sharply over the past couple of years. A good part of that was due to the prospective 2011 trust tax. But there’s also an emerging concern about the challenge of converting some CAD557.9 million of bridge credit facilities and maturing bonds into longer-term debt sometime over the next two years.

Thus far, management has preferred to put its plans on hold until credit market conditions improve, hedging exposure to rate swings to keep costs steady. That’s a situation it should be able to maintain some months more, given that the basic business is healthy and continues to generate growing, reliable free cash flow. And with high ratings from the Dominion Bond Rating Service (DBRS) and strong debt coverage, it’s not having any trouble currently getting a good rate for its near-term borrowings.

On the negative side, until the refinancing is done, it will overhang the stock, particularly given the credit-related scares in other sectors. And given the current state of the credit markets, forecasting a recovery and ability to do reasonable financing is problematic. Consequently, Consumers Waterheater Income Fund is a buy for patient investors only up to USD12, though the 13 percent yield is plenty of reward for holding.

As the Feature Article makes clear, producing energy is a volatile business. Nonetheless, Peyto Energy has been a model of stability.

Since its inception in 1998 and subsequent conversion to a trust in 2003, Peyto’s focus has been different from that of other trusts in two major ways. First, it’s focused exclusively on developing its own properties in its chosen area of expertise—unconventional “tight gas” properties—rather than acquiring those of others.

That’s paid off with operating costs that are a fraction of other trusts, as well as a reserve life based on proven reserves (90 percent or better chance of development) that’s longer than ExxonMobil’s at 16-plus years. Finding, Acquiring and Developing costs (FD&A) are also a fraction of rivals’ costs.

Second, management has consistently focused on paying a sustainable dividend rather than the highest it possibly could. The payout was increased 7.1 percent this year but, according to management, solely because of its success increasing reserves.

The first half 2008 jump in oil and gas prices, in contrast, was treated as a windfall to boost cash reserves and finance needed development. Operating costs in the second quarter were trimmed 4.5 percent per barrel of oil equivalent produced, and output was slightly lower.

Like all oil and gas trusts, Peyto sold its energy in the second quarter of 2008 at prices above current levels. And despite hedging, there’s bound to be some negative impact on cash flows in the second half of the year, particularly with natural gas 83 percent of the trust’s overall output. Barring a much deeper plunge in gas, however, distributions will still be comfortably covered by cash flow, thanks to cost discipline of earlier years and relentless growth of low cost reserves.

Looking ahead, Peyto remains basically two companies in one. The exploration side of the business is about finding and developing new tight gas reserves in western Canada. The production side is about getting these reserves out of the ground and to market in the most efficient way.

All of the trust’s efforts to date have been located in Canada’s Deep Basin, an area of very high potential resources located in ways that play to Peyto’s expertise. Management claims total potential reserves in the region are twice those of the whole Barnett Shale region of Texas.

Moreover, in contrast to shale gas, the company’s Cardium play—which accounts for one third of gas produced in that region—has been a proven resource in development for a decade. Cardium is currently around 60 percent of overall profits and management believes the company is only in the beginning stages of developing this find as well as several others.

In management’s words, it’s all about the money. They’re not interested in investing $1 billion for a $100 million return. They want a $100 million profit on a $100 million outlay. Success in achieving that goal is shown in the recycle ratio—measuring efficiency of capital employed in development—which is nearly twice that of rival trusts. That’s affirmation that management is succeeding in its stated goal of building wealth at the drill bit and generating high returns on capital.

The production side of the business has steadily grown in tandem with the exploration side. Peyto now has more than 200,000 acres of land under management as well as a network of energy gathering lines and processing facilities. These are run by a relatively small number of employees that are highly focused on controlling operating costs, evidenced by the fact that Peyto’s operating costs–including transportation–are barely a quarter of the typical trust’s.

In many ways, the production side’s biggest challenge is basically taking the new wells developed by the exploration side and integrating them cost effectively. Again, the measure of success has been the stability of operating costs, a particularly steep challenge given the volatility of recent years, but it’s one that Peyto has literally met better than anyone else in the trust universe.

It all adds up to an enterprise that’s focused on maximizing its exploration opportunities for the long run and sharing as much cash as possible with shareholders. Management has several ideas for maximizing its “tax efficiency” beyond 2011 to continue “sharing profits” in the form of paying big distributions. And as major shareholders themselves, their interests clearly align with ours. In fact, Peyto’s Web site is one of the very few I’ve seen that actually details all insider trading—and the buys far outweigh the sells.

Even an energy production business managed for stability is affected by energy price swings. But for conservative investors looking to garner a big yield, participate in an energy rebound and weather the current shaky times, it’s hard to find a better pick than Peyto Energy Trust, which is a buy up to USD20.

For more information on Consumers Waterheater Income Fund and Peyto Energy Trust, check out the How They Rate Table. Click on the “.UN” symbol to go to the Web site of our Canadian partner, MPL Communications, for press releases, charts and other data. These are substantial companies, so any broker should be able to buy them, either with their Toronto or US over-the-counter (OTC) symbols. Ask which way is cheapest.

Note that both trusts’ dividends are considered qualified for tax purposes in the US. Tax information to use as backup for filing them as qualified—whether or not there are errors on your 1099—is listed on the Canadian Edge Web site under the menu item “Income Trust Tax Guide.”

As is customary for virtually all foreign-based companies, the host government—in this case Canada—withholds 15 percent of distributions paid by Consumers Waterheater Income Fund and Peyto Energy Trust to US investors at the border. This tax can be recovered by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation, though unrecovered amounts can be carried forward to future years.

Both trusts will be subject to trust taxation beginning in 2011. Both, however, should be able to mitigate much of the prospective burden, Peyto with tax pools and Consumers by the nature of its asset base. Note that neither trust has significant US operations. Both have indicated they intend to remain big dividend payers well after 2011.