What happens to trusts in 2011? If the 23 in the How They Rate universe converting early to corporations are any guide, it should be a very positive experience for all concerned.

Nearly half the conversions haven’t affected dividends a penny. But even including those that have cut, converters are up well over 30 percent from their pre-move prices. The bottom line: They eliminated uncertainty surrounding 2011, and the market rewarded them with what amounts to a conversion bonus.

The catch is every trust’s situation is different, and dividend-cutters did face some initial selling before rebounding. The result is a cautious market that is deeply discounting all trusts. No trust is going to get its conversion bonus until management makes its move, and most importantly clarifies its post-conversion dividend policy.

That means those of us who own high-quality trusts backed by strong businesses are going to have to be a bit more patient. The positive: It’s still a golden opportunity to buy healthy, growing companies that have weathered the worst recession in decades, and at low prices we’re unlikely to see again.

This month, I’m adding such a gem, Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF), to the Conservative Holdings. A longtime How They Rate buy recommendation, the company has provided a range of services to the Canadian banking system since 1875.

Over the years management has seamlessly transitioned its line of products and services to meet the needs of the changing financial system.

When I first began to cover D+H in Canadian Edge earlier this decade, for example, the company’s main business was check supply, accounting for 95 percent of 2002 revenue.

Now, as banking has gone increasingly Internet-focused, it’s increasingly swung its business to technology-based programs related to other functions besides checking, including loan administration, property registration and lending technology.

The customer list is still the conservatively-run Canadian financial institutions that have thrived during the worst global financial crisis since the Great Depression of the 1930s. They include 18 giants ranging from Bank of Montreal (TSX: BMO, NYSE: BMO) to Manulife Financial (TSX: MFC, NYSE: MFC). D+H’s revenue has surged nearly 50 percent over the past 12 months, as it’s boosted its offerings to these institutions with a series of well-placed acquisitions and organic growth.

Aspects of D+H’s business have been affected by the weaker North American economy. Revenue from checking account programs, for example, fell 4 percent over the past year, as small businesses cut check orders from banks and there were fewer startups. That, however, was more than made up for by the launch of a new student loan administration services unit, which scored CAD21.1 million in revenue versus zero for the prior year.

Meanwhile, the company’s registration services unit–including the personal property search and registration operations added with the Resolve acquisition this year–posted a 16-fold increase over the 2008 third quarter.

The current revenue profile is still heavy on check programs at 45 percent, with registration services at 18 percent, lending technology 15 percent and a range of other operations including mortgage origination fees at 11 percent. That’s a share which is likely to fall in coming years as D+H broadens its revenue mix and due to what management describes as “the long-term historical trend related to cheque order decline.” In the meantime, however, it’s hardly slowing things down.

One big reason is the continued good health of Canadian banks, its customers. As we’ve commented many times in CE, the industry remains very healthy, as well as ripe to absorb new services.

The cost of financing the past year’s purchases of Resolve (July 2009) and Cyence (December 2008) showed up in generally flat third quarter profits per share, in part due to a 15.2 percent increase in outstanding units.

But both deals are expected by management to be solidly accretive in 2010 and beyond. In fact, on a US dollar basis, D+H’s cash flow was up 13 percent over the past 12 months, in large part thanks to their growth.

Management looks for stable and modest growth in student loan services in coming year. Registration services, meanwhile, will “move with changes in the economy.”

Lending technology solutions are anticipated to strengthen, as activity accelerates in Canada’s housing and mortgage industry.

One of D+H’s key advantages over the years has been its ability to squeeze the costs out of acquired operations. That portends well for the Resolve purchase, which is already more than half way to its goal of CAD8 million in annual synergies by the end of 2010. Debt taken on to finance the deal has been offset with timely refinancing to limit the increase in interest expense.

Management has fully hedged the CAD10 million in US dollar annual income resulting from the merger. Meanwhile, D+H has piled up CAD516 million in goodwill, which it will amortize, along with other “intangible” assets, to offset future taxes.

It’s this ability to shelter income with non-cash expenses that provides the most upside for post-conversion dividends. And because the company’s business plan is based around expanding its product line in part with acquisitions, it’s an account that will continually be replenished.

Ultimately, the dividend is management’s call. What’s not in doubt, however, is the ability of D+H’s solid underlying business to generate reliable cash flow and pay high dividends in even the worst of times. Nor is management’s track record of paying generous distributions since the company went public in December 2001. Debt is low at just 1.5 times annualized cash flow, and there are no significant maturities until 2011. Buy Davis + Henderson Income Fund up to USD15.

This month’s other pick, AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF), should be familiar reading to longtime CE subscribers. From a wealth-building point of view, however, the diversified energy infrastructure trust’s story just keeps getting better.

The trust continues to execute its strategy of adding high-quality assets that immediately boost earnings. Last month, it brought the 102 megawatt Bear Mountain Wind Park into operation ahead of schedule and on budget.

All output will be sold to BC Hydro under a 25-year deal. By law, rates for renewable energy in Canada automatically ratchet up over time and sales are based on capacity, and so must be paid regardless of availability.

That means exceptionally steady returns for AltaGas. And the trust has a projected CAD2 billion in such “real growth projects” targeted over the next five to seven years, ranging from renewable energy developments to gas business opportunities.

The company expects to begin realizing cash flows from its absorption of former unit AltaGas Utility Group this year. It added further to its regulated operations this week with the purchase of the 75.1 percent of Heritage Gas it didn’t already own. Heritage is a utility serving Nova Scotia with substantial growth potential. That deal is expected to add another 4 to 5 cents a share to 2010 earnings.

As for third quarter results, earnings and funds from operations (FFO) per share were roughly one-fifth lower than a year ago, in large part because of a 12.2 percent increase in outstanding shares to finance growth. Acquisition and construction capital spending must be absorbed up front, so there’s always a lag before the new assets begin producing income. The deal also added more debt, though debt-to-capital remains very low at 38.7 percent and Dominion Bond Rating Service lifted its rating. Third quarter distributions were 85 percent of FFO, in line with prior quarters.

Operationally, the extraction and transmission arm benefited from fewer maintenance turnarounds at facilities, the addition of new assets and lower overall operating costs. Energy services increased earnings due to a liabilities adjustment for natural gas transactions. Lower power prices, meanwhile, hurt overall results in electricity production. And field gathering and processing volumes were below year ago levels, as producers shut in output.

Looking ahead, AltaGas should benefit from a higher percentage of its revenue coming from long-lived, fee-for-service assets. The company’s natural gas business has remained profitable throughout one of the worst periods for drilling ever and is well-positioned to profit from an increase in activity. Meanwhile, it’s continuing to build a major presence in low-cost renewable energy, a growth industry for years to come.

AltaGas’ shares have come well off their lows of last March. Nonetheless, they’re arguably still deeply discounted at just 1.37 times book value and a yield of nearly 12 percent.

The obvious explanation is investor misgivings about the trust’s planned conversion to a corporation, which at this point management has set for sometime in late 2010.

The trust is still officially targeting a post-conversion annualized dividend rate of between CAD1.10 to CAD1.40 per share, while affirming it will maintain the current monthly rate of CAD0.18 as long as it stays a trust.

That would be an effective reduction of 35 to 49 percent from the current rate.

The resulting post-cut yield would still be between 6 and 8 percent, numbers that aren’t going to turn many heads in today’s yield chasing environment. But consider this: AltaGas’ decision is based on a desire to direct more cash to grow earnings, which always mean rising dividends and share prices long term.

The company has proven its earning power in the worst economic environment in decades and despite a virtual depression in the energy patch. And it will be able to grow a lot faster as the North American economy recovers.

That’s an attractive combination for both the ultra-conservative and growth seekers. And it’s more than enough reason to buy AltaGas Income Trust up to USD20 if you haven’t yet.

For more information on Davis + Henderson and AltaGas, visit How They Rate. Click on the “.UN” symbol to go to the website 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 OTC symbols. Ask which way is cheapest.

Click on the trusts’ names to go directly to their websites. And click on their US symbols to see all previous writeups in Canadian Edge and its weekly companion Maple Leaf Memo.

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 website.

As is customary for virtually all foreign-based companies, the host government–in this case Canada–withholds 15 percent of distributions paid 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’ managements have confirmed they’ll convert to corporations sometime before the end of 2010. Neither has declared a date for conversion. Davis + Henderson CEO Bob Cronin was pushed to the wall on the question of a post-conversion dividend during the trust’s November 3 conference call and only stated that a policy would be forthcoming “in 2010.”

The point, however, is that market expectations are very low for both, evidenced by their current yields in the 12 percent range. Both trusts also trade around 1.4 times book value. Consequently, it won’t take much for an upside surprise.