When it comes to investing, even a money market fund or a certificate of deposit doesn’t offer perfect safety. But yields of 7 to 11 percent backed by healthy and growing companies come pretty close–especially when you add in the fact that the dividends are paid in the natural inflation hedge of Canadian dollars.

I’m speaking of the handful of Canadian Edge Portfolio members that meet all six of the criteria in my Safety Rating System. They’re by no means my only recommendations. Their numbers, for example, include no producers of oil and gas, whose cash flows are constantly driven higher and lower by energy prices. Nor do they include any battered comeback candidates that survived the recent recession and are poised to throw off huge profits from the recovery.

Those aren’t the kind of recommendations you want to own, however, if you’re primarily interested in high, safe income. Rather, your focus should be on the companies that best meet exhaustive criteria that measure financial strength, dividend coverage, consistency of revenue and cash flow in all economic environments and–for trusts–how they’re set to fare when 2011 taxation kicks in.

The CE Safety Rating System uses six criteria to measure these factors. The result is a rating based on the number of criteria met. The greater the number of criteria met, the higher the rating–and the safer the company’s cash flow stream and distributions. A company rated “6,” for example, has achieved the pinnacle of safety, while a company rated “0” is the most at risk.

Not every company rated “6” is always a buy, and not every “0” is always a sell. That’s because value is a function of price as well as underlying business quality. Even the greatest company can be overvalued, while the weakest may be a value if its price has slipped far enough.

By and large, however, investors are best off sticking to the companies that best suit their investment strategy. That’s a lesson many have forgotten in their pursuit of the highest yields, which look mighty good but frequently carry grave risks with them. But it’s one all successful investors have learned–some the hard way–on their road to building real wealth.

Below I focus on the 10 CE Portfolio picks that best exemplify the combination of recession-proof safety along with generous yields that have the potential to grow year after year. All hail from the Conservative Portfolio, meaning their dividends are never at risk to rising or falling commodity prices.

US investors can profit from higher energy prices by virtue of their being priced in and paying dividends in Canadian dollars, however. The Canadian dollar over the long haul has followed oil prices, which in turn have always kept pace with inflation. As a result, these 10 companies are among a very small handful of income investments that can actually profit from both a US dollar crisis and faster inflation.

The average current yield is about 9 percent. That’s somewhat less than they yielded even a few months ago, owing mainly to their rising unit/share prices. But it’s still higher than almost anything of comparable safety. These companies have proven their ability to pay these dividends in the worst economic conditions over the past several years. And even those that have not yet converted from trusts to corporations are set to maintain those yields well past 2011, if not raise them as their businesses grow.

Again, if you’re looking for high-octane gains, look to the Aggressive Portfolio. These were hammered in late 2008 when energy prices crashed and, despite a sharp rally in 2009, are still cheap. My oil and gas producers, for example, universally sell at sharp discounts to the value of their assets in the ground. They’re literally the equivalent today of buying oil at USD30.

But if income is your game, you’re going to want to have these 10 in your portfolio. Here’s a look at the CE Safety Rating System, and why these companies match up so well. I highlight the companies themselves later in this article.

Six-Point Safety

Ratings systems are only as useful as they measure objective criteria. Here in brief are my CE six:

• A company’s payout ratio meets “very safe” criteria for its sector.
• A company’s payout ratio is below the “at risk” level for its sector.
• A company’s debt-to-assets ratio meets “very safe” criteria for its sector.
• A company is either already organized as a corporation, a qualifying REIT (no change to tax status in 2011) or has clarified its dividend policy for when it converts to a corporation.
• A company’s primary business is recession resistant. Virtually all Electric Power and Energy Infrastructure companies meet this criterion, though some in other industries do as well.
• A company’s profitability is not directly affected by changes in commodity prices.

Companies’ ratings are determined by how many criteria they meet. Those meeting six, for example, will draw a rating of 6. Higher ratings mean more criteria are met and therefore companies with safer dividends.

Pipeline and electric power trusts tend to score highest on the CE ratings system for one reason: Their businesses are non-cyclical in nature. As they proved throughout the recent debacle, cash flows are steady regardless of the surrounding economic environment.

Several REITs have high ratings, as long-term leases safeguard cash flows and capital costs are broadly transparent. By contrast, Natural Resource, Oil and Gas producer and Energy Services companies have the most volatile cash flows and therefore the riskiest/ lowest ratings.

Payout ratios are the most important single piece of data when it comes to dividend safety. It’s basically the current distribution rate expressed as a percentage of a company’s profits. Lower percentages in general indicate a greater degree of dividend safety, but with three caveats.

First, the relevant measure of income per share varies from company to company, depending on structure. For corporations, earnings per share (EPS) is the best measurement. This number is tracked by most brokerages and data sources.

It’s important, however, to factor out any one-time gains or losses. A writeoff taken for retiring debt, for example, can mask an otherwise healthy company by producing an inflated payout ratio. Similarly, a one-time gain from the sale of an asset can pump up earnings and produce misleadingly low payout ratio, masking risk.

Meanwhile, EPS is basically worthless when measuring the profitability of Canadian trusts and REITs. Both structures are basically set up to minimize taxable income and therefore EPS. Payout ratios calculated using EPS will be meaninglessly high for this reason, creating the misperception of high risk.

Rather, profitability of trusts and REITs should be gauged using distributable cash flow (DCF) per share. DCF is basically revenue less all expenses, including capital spending needed to maintain assets, commonly known as maintenance capital spending. DCF is basically the cash companies have left over each quarter to pay dividends, grow the business and pay off debt.

After Jan. 1, 2011, the vast majority of trusts–excluding REITs–will convert to corporations, per the Tax Fairness Act. At that point, their tax accounting will be just like any other entity. Many, however, will continue to pay distributions as a percentage of DCF–which will then be post-taxation–rather than EPS. Payout ratios based on DCF will still present the best measurement of dividend safety.

You can distinguish trusts from corporations in How They Rate by their Toronto Stock Exchange symbols. Trusts are always indicated by “.UN” next to their names. Corporations never include the “.UN” suffix.

The second caveat regarding payout ratios is that some businesses are seasonal, with most revenues reported in one quarter or another. The spring quarter (Q2), for example, is always light for companies that produce oil and gas in regions where the thaw has a major impact on activity. Apartment REITs typically have a tight winter quarter (Q1), because they cover heating bills for tenants.

As a result, the best idea for these businesses is to compare one quarter’s payout ratio with that of the prior year, as well as how it fits in with those of other quarters throughout the year. That’s what I do in my comments in How They Rate and also elsewhere in the issue.

Third, some companies operate in industries where cash flows are highly predictable such as power generation, while others face high volatility. Companies with steadier cash flows can sustain higher payout ratios than those in less steady sectors.

That’s why my payout ratio criteria in the Safety Rating System vary from sector to sector. Here’s my scale for assessing the various sectors. Note that it’s always listed in the text shown under How They Rate, along with explanations for other data shown.

I also use a sector-based scale for gauging debt and balance sheet risk.

As with payout ratios, companies in sectors where revenue and cash flow is steady can sustain higher levels of debt without increasing risk to their dividends.

Those in more volatile sectors must keep a tight watch on their obligations.

A company’s long-run ability to pay dividends is heavily influenced by the constant need to re-finance debt and make interest payments.

That’s why I now list debt-to-assets ratios, which compare each company’s total obligations to the value of the assets on its books. 

The ratio is calculated by dividing total debt by total assets. As with the payout ratio, the result in How They Rate is expressed as a percentage.

As with payout ratios, the general rule with debt-to-assets ratios is the lower the better. But what’s a suitable ratio can vary widely from industry to industry. Also, already converted corporations (no “.UN” next to their TSX symbols) can generally handle more debt than trusts that are yet to convert. Here’s the breakdown, also shown in the text below the How They Rate table.

Criteria four, five and six are not numerically based, but involve pretty straightforward answers.

First, companies that have clarified their dividend policy after 2011–either as corporations, REITs or trusts that have announced conversions to corporations–have no 2011 dividend risk.

Following Finance Minister Jim Flaherty’s announcement of the 2011 tax on trusts on Halloween night 2006, investors have broadly assumed that trusts would either liquidate or convert to corporations, slashing dividends deeply.

Within a couple weeks of the announcement, trusts’ prices fully reflected those very low expectations, and they have ever since.

My contention that this has set a very low and easily beatable bar of expectations has been borne out in the first 28 conversions of How They Rate trusts.

And I firmly believe that the remaining conversions offer similarly explosive upside, primarily for trusts that have strong underlying businesses as our Portfolio picks do.

I’m also no mind-reader, however, and I don’t pretend to know for certain what the management of, for example, Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) will do with its distribution when it converts.

As a result, I award one point in the ratings system for any trust, corporation or REIT that has eliminated this uncertainty by doing one simple thing: Clarifying what its dividend will be when the trust taxes kick in.

Finally, criteria five and six are basically two sides of the same coin. Companies that don’t rely on commodity price-sensitive cash flows by definition have far safer dividends than those that do. That was clearly demonstrated by the vast wave of distribution cuts in late 2008 and early 2009 among oil and gas producer trusts, which my commodity price-resistant Conservative Holdings almost entirely avoided.

Of course, there are other businesses that are economically sensitive and therefore vulnerable to the level of economic activity. The good news is they’ve pretty much revealed themselves over the past couple of years. The bad news is, again by definition, dividends of more cyclical companies are at greater risk than those of non-cyclical companies. As a result, it’s only the non-cyclical that get this last point, and therefore the perfect 6 score on my ratings system.

Perfection and Near-Perfection

Currently, only nine of the 150 companies tracked in How They Rate earn 6s. And only seven are currently members of the Canadian Edge Portfolio.

In the case of Canadian REIT (TSX: REF-U, OTC: CRXIF), the reason for exclusion from the Portfolio has chiefly been the premium the market has attached to its unit price. And with the current yield less than 5 percent and a price-to-book value of 3.36-to-1, that’s still the case. The other 6 not in the Portfolio is actually former pick Algonquin Power & Utilities (TSX: AQN, OTC: AQUNF), which owes its dividend safety largely to gutting its payout by 73.9 percent back in October 2008.

The company’s growing asset base of hydroelectric power plants and regulated water treatment systems is very attractive. And because it’s a nice target for a takeover trading at 1.0 times book value, I’ve rated Algonquin a buy in How They Rate for some time. But with a yield of only about 5.5 percent, I like my 6-rated Portfolio picks better.

As a result, to round out my 10 companies offering near-perfect dividend safety, I’ve thrown in three 5-rated companies. First up are a pair of renewable energy companies: High Yield of the Month Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF) and Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF).

Since announcing its conversion to a corporation last year, Brookfield Renewable units have surged by more than 40 percent, and with good reason. The company, which doesn’t plan to convert to a corporation until late 2010, is executing a strategy that will leave its distribution intact well past 2011, with the potential for growth as it adds assets.

The cornerstone of Brookfield Renewable’s strategy is profitably absorbing the drop down of hydro and wind assets from parent Brookfield Asset Management (TSX: BAM/A, NYSE: BAM).

The new company now controls 15 operating hydroelectric plants with 387 megawatts of capacity spread across Canada. It also derives 15 percent of output from a wind farm, with another major facility in development.

Substantially all of its energy is sold under long-term contracts to provincial governments and creditworthy utilities.Contracts have built-in rate increases, with wind plants collecting cash even if weather conditions prevent them operating at full capacity.

The major risks to this business are the ability to finance existing and planned projects and water flows, which can vary widely from year to year depending on the watershed in question. Brookfield Renewable’s size and relationship with Brookfield Asset Management mitigate the first. The second is mitigated by geographic diversification, with heavy rainfall in one watershed often making up for drier and therefore less productive conditions in another.

The major risks to the stock would include an upward spike in interest rates and inflation, though rate escalators at its plants would push cash flows and presumably distributions higher. Brookfield Renewable shares, however, are still below their mid-2007 highs, despite being a much more valuable company now.

A takeover by a power generator in need of carbon neutral power remains possible. But even without it, Brookfield offers steady, recession-proof growth and a solid yield that’s never been cut. Buy Brookfield Renewable Power Fund up to USD19.

Atlantic Power Corp (TSX: ATP, OTC: ALTIF) is another power company that’s never cut its dividend. In fact, management raised it to the current level of 9.12 cents Canadian per month in December 2008, at the height of the financial crisis.

Atlantic Power converted from an income participating security (IPS)–combining debt with equity–to common stock in late 2009. That eliminated the risk of a reduction when the former bond portion of the IPS matured in 2016.

Management also gave a dramatic boost to its balance sheet by converting the debt to equity and minimized the tax burden of conversion by utilizing its unique status as a Canadian company operating almost entirely in the US.

Looking ahead, the biggest risk to the company’s dividend is a management stumble assessing risk to the cash flow from its power plant and power line assets.

These are not directly operated by Atlantic. Rather the company manages them through third parties and attempts to lock in the cash flow by hedging out exposure to interest rates, commodity prices and selling prices for output.

It’s a strategy that was sorely put to the test during the great North American recession of recent years, and management proved more than up to the task. In its efforts, it was aided immeasurably by the fact that all of its power sales contracts are with either regulated utilities or investment-grade corporations, or both. Utilities in particular are great all-weather customers: Not one has ever defaulted on a contract with an independent power producer like Atlantic.

Looking ahead, the company has numerous opportunities for new projects in natural gas as well as renewable energy. The shares have run-up, but that’s commensurate with the evaporating risk. Atlantic is still rated a 5 in How They Rate because the last data available reflects a debt/assets ratio prior to the conversion. As a result, it will almost certainly earn an upgrade to a 6 when it finally announces fourth-quarter numbers on March 30. Meanwhile, Atlantic Power Corp is a buy up to USD12 for those who don’t already own it.

Unlike Atlantic Power and Brookfield Renewable, Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) has reduced its distribution once, that being with its announcement that it will convert to a corporation by late 2010. That move took the monthly rate to 5.5 cents Canadian from a prior 8.75 cents. Not too surprisingly, however, the units have rallied solidly since, as the company has executed the rest of its strategy to build a framework for future growth while affirming the security of the current payout rate.

Last month management offered an encouraging update on its progress, getting its Whitecourt biomass facility back on track, boosting projections for the 2010 output of the key Cardinal and wind-power plants and working through balance sheet challenges.

The company now expects to see higher cash flow in 2010 from operations. Coupled with CAD20 million in saved cash from the dividend cut and CAD100 million in available cash, this will provide a strong platform to pursue its goal of acquiring more cash-generating infrastructure.

Like other power trusts, Macquarie’s output is sold under long-term contracts that mitigate power-price and commodity-price risk. That leaves management execution of future asset purchases as the primary risk. Management was highly effective at this before restrictions on trusts’ raising capital limited its ability to finance deals. That won’t be a problem after conversion. Meanwhile, the investment in retirement home Leisureworld continues to generate steady cash.

Despite its strengths and the fact that its payout ratio will average just 70 to 75 percent over the next five years, Macquarie still yields more than 10 percent and sells for just 1.12 times book value. That makes it about the cheapest of 6-rated CE companies. Buy Macquarie Power & Infrastructure Income Fund any time it dips below USD8.

As the debacle of late 2008 proved, operating energy infrastructure is every bit as reliable of a business as generating power under long-term contracts to utilities.

One reason is the primary customers are large energy companies, some of which are among the most creditworthy in the world.

Another is profits from pipelines, energy storage facilities and processing centers don’t depend on energy prices.

In fact, revenue is frequently guaranteed by contracts that bill based on capacity, rather than throughput. As a result, the best of this sector are immune even from ups and downs of energy production.

Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) and Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) rate the best of this class. Both proved the reliability of their revenues by increasing distributions over the past couple years, as they brought profitable new assets and began earning cash from then even as the financial system and energy patch were floundering. And both have a rich pipeline of new projects to bring on line coming forward.

These are focused primarily on still-growing oil sands development and non-conventional natural gas drilling. Keyera, for example, has forged a venture with Imperial Oil (TSX: IMO, NYSE: IMO)–ExxonMobil’s (NYSE: XOM) Canadian arm–to provide transportation, storage and rail offload services for diluent, a light hydrocarbon commonly mixed with bitumen produced from oil sands.

The deal will enable Imperial to produce more oil and will line Keyera’s pockets with its trademarked fee-based income. Pembina, meanwhile, continues to bring the Mitsue and Nipisi oil sands project closer to startup, which will further engorge its cash flows.

Neither Keyera nor Pembina have converted as yet to corporations. In fact, it’s likely both will wait at least until late 2010. Both, however, have declared they’ll be paying at least the same level of distributions when they convert as they do now.

Coupled with low payout ratios, low debt, recession-resistant cash flows and lack of exposure to energy price swings, that earns both perfect 6s under the CE Safety Rating System. And that point is underscored by the fact that neither has ever cut dividends.

Pembina still yields close to 9 percent, while Keyera yields only a bit over 7 percent. Both, however, are in line for solid cash flow and distribution growth for years to come, and particularly as rising oil and gas prices stir more energy patch activity and open the door to new projects.

Despite recent gains, Keyera Facilities Income Fund and Pembina Pipeline Income Fund are cornerstone buys up to USD24 and USD18, respectively, for even the most conservative investors.

AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) has also never cut its distribution, thanks to operating an exceptionally solid business running power plants, pipelines and other energy infrastructure. The trust continued its history of successful acquisitions last month, announcing the takeover of Landis Energy, a developer of underground natural gas storage facilities primarily in Atlantic Canada.

Landis’ primary project is the Alton natural gas storage project located near Truro, Nova Scotia. At present, there are no underground gas storage facilities north of Boston along the Maritimes and Northeast Pipeline route. And the relatively low 6.7 percent premium for Landis is a good sign that the project will be strongly accretive when it starts up in the near future.

AltaGas currently yields a hefty 11.7 percent. The main reason is management’s prior statement that it would convert to a corporation in late 2010 and then set a new annualized dividend rate between CAD1.10 and CAD1.40.

The units are currently priced to yield roughly between 6 and 8 percent, a reasonable level based on those estimates.

On the other hand, AltaGas units also trade at just 1.4 times book value and barely one times sales.

That’s hardly commensurate with the company’s historically robust revenue and cash flow growth, its strong balance sheet or its solid payout coverage, and still less the earnings potential of its ongoing stream of acquisitions.

That adds up to a strong likelihood of powerful gains. And that’s even if management does insist on a sizeable distribution cut to go along with its conversion, by no means a sure thing.

AltaGas doesn’t get a 6 rating solely because of the uncertainty surrounding its post-conversion distribution. But it is a solid value for those who don’t already own it. Buy AltaGas Income Trust up to USD20.

The final three of my top 10 for safety actually have nothing to do with either power generation or pipelines. Rather, they’re companies focused on recession-resistant niches in their sectors that have further fortified themselves with strong balance sheets and generous but still conservative dividend policies.

Food distributor Colabor Group (TSX: GCL, OTC: COLFF) converted to a corporation last year without cutting its distribution. That should not have come as a surprise to anyone, since the company had been paying full tax rates since completing a transforming merger in 2007. It did, however, unlock considerable value in the stock, which is now up 33 percent since the day before its July 8, 2009, announcement.

Colabor’s core business of food and related product distribution is one of the most stable in any economic environment, and it proved that once again during the recent recession.

Now, management is again squarely focused on expanding its franchise beyond its core Quebec and Atlantic Canada territory across the country. Its strategy is focused on acquisitions, which will be immeasurably easier going forward owing to a lower cost of capital thanks to its high share price.

The stock’s currently posted yield is based on a quarterly dividend payment that included four months’ worth of distributions rather than three, the result of a switch to a quarterly rather than monthly rate. As a result, its true yield is a little over 9 percent. That’s still a steal, however, for such a high-quality company–no dividend cuts in its history–that’s locked in for robust long-term growth.

Trading for just 1.24 times book value, Colabor Group is a buy for those who don’t already own it up to USD12.

Canada’s property market didn’t break as its US counterpart did during the recent recession. But it did bend a bit, sending a number of REITs to their doom, including several operating in the hard-hit energy patch.

Not so for Northern Property REIT (TSX: NPR-U, OTC: NPRUF), another super REIT whose distributions have gone steadily upward over the years, and never downward.

Despite operating in some of the country’s hardest-hit markets–including boom/bust Fort McMurray, Alberta–the REIT has maintained high occupancy rates and rent growth throughout the recession, while positioning for growth on the other side.

One reason for its strength is sheer diversification, as operations range as far north as Nunavut and the Northwest Territories where competition is nil.

Another is the REIT’s historical focus on only the strongest of tenants, for example the provincial and federal government and related entities. Most important, however, is management’s relentless conservatism in building its business, a strength that sets it apart from rivals and particularly from boom/bust US REITs.

That’s a formula that attracted me to Northern Property during the good times, and it’s kept investors very happy during the bad as well. My only complaint about the REIT is we can’t buy its units at less than USD12 like we could in early 2009. But for an ultra-reliable REIT, there’s nothing like it anywhere in North America. Buy Northern Property REIT up to USD22 if you haven’t yet.

Last but not least is 5-rated Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF). A recent addition to the Conservative Holdings, the trust fails to make a perfect 6 solely because it has yet to declare its intentions for its dividend after converting to a corporation later this year.

As a business, Davis is a gem, serving a blue-chip list of clients in Canada’s financial services industry with electronic and printed checks and other forms for related services. Over the past several years it’s successfully transitioned its printed check business to the web and as a result is more essential to its customers than ever.

Debt is low, revenue growth is steady–consistently meeting or beating management’s annual target of 3 to 5 percent–and the path to growth is clear.

Faster economic growth, for example, is already lifting demand for services ranging from auto registration to need forms in the housing and stock market business. The payout ratio and debt are also low, demonstrating management’s innate conservatism.

Davis will announce its fourth-quarter and full-year 2009 earnings February 24. It’s possible at that time it will give some guidance about the post-conversion dividend along with expectations for 2010. That’s the point I would expect a lift in the share price, no matter how conservative the new payout policy proves, i.e. a dividend cut.

Meanwhile, the shares are clearly pricing in at least some kind of distribution cut, yielding well over 11 percent and selling for just 1.57 times book value.

Up solidly already from my recommendation last year, Davis + Henderson Income Fund is a super buy up to USD17 even for the most conservative investors.

Numbers and Conversions

Here are expected reporting dates for Canadian Edge Portfolio holdings for fourth-quarter and full-year 2009 earnings. Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) has already reported (see High Yield of the Month).

Oil and gas producers will also be releasing information on their reserves. Meanwhile, a number of trusts will also be offering guidance on their plans for 2011 and beyond, with a focus on future distribution policies.

I’ll be updating the numbers in Flash Alerts and the weekly Maple Leaf Memo as news comes available, with a full roundup in the March issue of Canadian Edge. Note that owing to the large amount of data with year-end compilations in Canada, a number of companies won’t announce results until after the next issue date. They’ll be highlighted in Flash Alerts and MLM, with a full recap in April.
Conservative Holdings

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–February 26
• Artis REIT (TSX: AX-U, OTC: ARESF)–March 16
• Atlantic Power Corp (TSX: ATP, OTC: ATLIF)–March 30
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–February 12
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–February 9
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–February 24
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–March 4
• Colabor Group (TSX: GCL, OTC: COLFF)–March 4
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–February 24
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–February 12
• Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF)–March 16
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–February 11
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–February 18
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–March 2
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–March 17
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–March 3
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–February 9
• TransForce (TSX: TFI, OTF: TFIFF)–February 25
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–February 11

Aggressive Holdings

• Ag Growth International (TSX: AG-U, OTC: AGGZF)–March 16
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–February 11
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–February 19
• Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF)–March 4
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–February 26
• Newalta (TSX: NAL, OTC: NWLTF)–March 5
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–March 10
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–February 18
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–March 10
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–March 11
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–March 3
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–February 12

Counting Innergex, a dozen current and former CE recommendations have announced conversions to corporations. Dividend policies continue to vary widely. Of the dozen, six cut distributions while six did not. Some of the reducers eliminated distributions while others cut very little, as Innergex did.

However, all except Trinidad Drilling (TSX: TDG, OTC: TDGCF) are up since announcing their conversions, most by substantial margins. And the same has proven true for other strong companies that have converted from trusts to taxable corporations.

That’s something all investors should keep in mind when it comes to trying to anticipate what strong trusts that have yet to convert will do with their dividends. Odds are heavy they’ll try to pay all they can. And if they do have to cut, share prices are going up anyway.

Even Trinidad is the exception that proves the rule. The trust’s unit price nearly doubled in value from the point at which it announced conversion in January 2008 until the time when energy prices peaked in summer 2008.

Trinidad shares fell sharply in during the crash of late 2008. But it had absolutely nothing to do with 2011 trust taxation or converting to a corporation. Rather, falling energy prices brought oil and gas drilling to a virtual standstill in North America, collapsing cash flows for the whole drilling sector. Trinidad has actually outperformed its peers by a wide margin over that time. In fact, it’s one of the few companies in its sector to still pay distributions.

Following is a list of the trusts in the Canadian Edge Portfolios that have yet to announce or implement post-conversion dividend policies. The rest have either converted, don’t have to convert or have yet to convert but have otherwise announced plans for post-conversion dividends:

• AltaGas Income Trust
• ARC Energy Trust
• Bell Aliant Regional Communications Income Fund
• Bird Construction Income Fund
• CML Healthcare Income Fund
• Davis + Henderson Income Fund
• Daylight Energy Trust
• Enerplus Resources Fund
• Paramount Energy Trust
• Penn West Energy Trust
• Peyto Energy Trust
• Provident Energy Trust
• IBI Income Fund
• Yellow Pages Income Fund

My strong expectation is that most, if not all, of these will continue to pay out at their current rates. If their conversions are cut-less, we can expect windfall gains in their share prices.

Even if they should cut, however, it’s no reason to abandon positions in strong companies, which these most definitely are. Innergex, for example, sold off slightly on the day of its conversion announcement. But it made up the lost ground and then some the following day.

The key for converting companies is uncertainty has been removed. Some investors may panic and jump ship. But expectations have been so low for post-conversion dividends that–so long as companies don’t file for bankruptcy–buyers have rushed right in, pushing prices higher. Simply, the biggest worry in the public’s perception–2011 taxation–has been settled.

There’s no longer any reason not to look at the strength of underlying businesses, which have proven themselves again and again over the past several years. And once investors do, they bid these companies higher.

Should any investor be unhappy with the post-conversion yield and want to move on, there will at a minimum be a higher price to sell out. In fact, prices within a few weeks have typically been at least 15 to 20 percent higher.

My hope, however, is that readers will find that safe and growing yields of 8 to 10 percent are worth sticking around for. A strong business–not a few percentage points difference in yield–is the key to building wealth. As long as a converting trust has a strong business behind it, we’ll ride for the long haul. And whether the yield is 8 or 15 percent, you should too.