Beating expectations: That’s the key to building wealth on Wall Street. And rarely has it been as easy as this year with Canadian income trusts converting to corporations.

Chances are by now you’ve heard the all-too-familiar conventional wisdom peddled in the financial media, including by some Canadians: Trusts’ conversions to corporations are a final disaster for investors, featuring steep dividend cuts, plunging stock prices and even liquidations.

Fortunately, reality is shaping up quite differently. As the table “How They Rate for 2011” shows (click here or scroll down the end of the article), a good many trusts have yet to announce what they’ll do when the new taxes kick in Jan. 1, 2011. But 26 have already converted to corporations, handing investors an average gain of 63.1 percent since announcing their moves. Another 19 have stated what dividends they’ll pay after converting; these trusts are up an average of 22.4 percent already. That includes several that revealed their strategies just this past week.

The doomsayers have been right about one thing: There have been dividend cuts. Some converters have gone so far as to eschew paying dividends forever. Even those companies’ shares, however, have wound up scoring outsized gains after the deed was done.

Shares plunged initially as dividend investors bailed out. But in the weeks that followed they were replaced by value investors, who quickly bid up prices for solidly run businesses.

That’s even happened in industries particularly battered by the recession and credit crunch. The only real losers were investors who listened to the pundits and panicked.

Moreover, fears that new taxes would force all trusts to cut dividends have proven dead wrong. In fact, nearly half of the companies that have announced and/or completed conversions thus far didn’t cut their distributions one cent.

Baytex Energy Trust (TSX: BTE-U, NYSE: BTE) actually increased its dividend by 50 percent when it announced its conversion last year. Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF), which will convert in December, bumped up its distribution 4 percent last month after announcing blockbuster fourth-quarter earnings.

Most trusts that converted in 2008 couched their actions as moving to become “growth” companies, largely gutting their distributions in the process. As a result, their share prices largely dropped off a cliff initially, as income investors sold en masse. They’ve mostly recovered that lost ground, as a new group of growth and value investors have moved in. But sharply lowered share prices in the near term–coupled with the unfolding credit crunch–did limit their access to capital–and hence ability to grow–for a long time.

That lesson hasn’t in been lost on companies converting in the past year. In stark contrast to the early movers, most have preserved as much of their payouts as possible–and they’ve been rewarded in the marketplace. Most companies making cuts like Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF) have seen shares drop initially but then rebound sharply within days, if not hours. And companies not cutting dividends have seen an immediate payoff as their shares have headed higher, sometimes much higher.

Crescent Point Energy (TSX: CPG, OTC: CSCTF) has been able to grow its production by more than 50 percent since announcing its conversion last year. The reason: Not cutting dividends triggered a buying wave that sent its shares up more than 50 percent, allowing it to aggressively make acquisitions using its own stock.

Not cutting the dividend at conversion meant Crescent management had a lower share of operating cash flow to reinvest in the company as taxes kicked in. But not cutting also provided cheap equity capital to acquire choice assets held by financially weak junior producers. That, in turn, boosted production and generated additional cash flow. The post-conversion company not only absorbed the new tax and held its dividend. It was able to grow faster than ever, too.

The more trusts have been rewarded for holding dividends steady the more converters have followed the Crescent example. Not every company has had the earnings power to avoid dividend cuts. But time and again, we’ve seen converting trusts set their dividends higher than the market expected. Better than expected dividends, in turn, have led to share price gains, as years of suspicion and bad information about 2011 have been washed away instantly.

Trust conversions have not just been relatively benign for investors. A growing number are actually generating windfall gains. Barring an unlikely catastrophe in the Canadian market later this year, we’re certain to see many more such gains as trusts make their move toward the post-2010 world.

Meanwhile, today’s low pre-conversion prices are an ideal opportunity to lock down high yields paid by healthy, growing companies, which are likely to increase distributions as they put 2011 behind them.

For the Record

First, let’s look at the record of trust conversions completed so far. The table “Conversion Facts” shows the big picture, while “How Converters Fared” breaks down the individual companies that have converted.

The most important takeaway from both tables is that 21 of 26 trusts to complete conversions so far have scored big gains since making their announcements. In fact, some of the biggest gains have come from companies that have made the biggest cuts or weren’t paying a dividend at all when they made their moves.

The obvious explanation is investors were expecting worse from the conversion process. Some companies were literally forced by deteriorating business conditions to take the drastic step of eliminating their dividends. By converting, however, they proved to investors that there was still life in them, and that’s all it took to beat the bar of expectations and bring back buyers to their stocks.

The skinny on pre-conversion Advantage Oil & Gas (TSX: AAV, NYSE: AAV) a year ago, for example, was that the company was facing rising risk of a giant margin call from creditors. That was brought on by a combination of plunging natural gas prices and debt taken on to develop its prolific resources in the Montney Shale area.

The company made its move quickly, announcing a conversion to a corporation, selling assets and eliminating its dividend as it renegotiated a new deal from creditors. The dividend cut was more than priced in by the market. Advantage’s return to solvency was not, and its shares have surged since–despite the fact that natural gas prices have continued to slump. The company beat a very low bar of expectations, but that’s all that mattered in the end.

Of course, the market has smiled more brightly still on companies that have avoided cuts during conversion, which segues nicely into the second key takeaway: The stronger the underlying business of the converting company the better it performed following conversion.

At first glance, this may seem obvious. But with investors hung up on Flaherty’s Folly and the imposition of the trust tax in January 2011, all too many have forgotten the simple fact that it’s the underlying business that counts when it comes to investment returns. By eliminating 2011 as an issue, converting companies have refocused investors on the health and growth of these businesses, and the strongest have prospered.

CE Aggressive Holding Ag Growth International (TSX: AFN, OTC: AGGZF), for example, was trapped in a trading range around CAD20 per share before announcing its conversion last year. That allowed investors to concentrate on the fact that it provides grain-handling equipment, a super-growth business given the record corn and soybean crops of recent years.

Conversely, all four of the former trusts still underwater since their conversions have been dealing with severe business conditions. All have proven their mettle by surviving the last couple years and have surged well off their lows, which in some cases were quite deep. But they’ll almost certainly need a more vibrant economy to bring them fully back.

Groupe Aeroplan (TSX: AER, OTC: GAPFF), for example, has continued to grow its customer loyalty management services business by inking new alliances. But as a 38 percent drop in fourth-quarter operating income attests, the weak economy is still a drag on profits. Imvescor (TSX: IRG, OTC: IRGIF) appears to be coming out of the woods now. But last year the company and its former income trust affiliate PDM Royalties Income Fund were forced to scalp investor dividends and consolidate operations to deal with a very weak environment for franchised restaurants.

Aggressive Holding Trinidad Drilling (TSX: TDG, OTC: TDGCF) has had perhaps the toughest road of all as a business since conversion. One of the first trusts to convert, Trinidad’s stock price nearly doubled from its January 2008 announcement to the mid-2008 peak in energy prices. The company cut its dividend more than 85 percent, but early conversion put 2011 behind it–and investors bought the driller’s stock as a way to cash in on what seemed to be an endless rally in energy.

Unfortunately, that rosy scenario quickly deteriorated in the second half of 2008, as the unfolding credit crunch, global recession and market crash sent energy prices plunging. Trinidad’s shares dived from the mid-teens to a low of USD1.65 on Mar. 13, 2009, before recovering to their current range of USD7 to USD8 as the company has proven its ability to keep generating steady cash flows amid horrific conditions.

Of course, Trinidad’s shares have fared much better than the other energy services companies in How They Rate, several of which appear to be on the brink of bankruptcy. The point, however, is the underlying business has set the tone for post-conversion performance, once the distraction of 2011 has been removed.

Takeaway No. 3 is that although most conversions in 2008 involved deep dividend cuts, most in 2009 did not. There are exceptions to the trend, for example the weakening companies listed above. But management of most trusts seems to have taken the hint that investors prefer dividends. In fact, paying a high distribution remains converted trusts’ primary method of attracting capital needed for growth.

Cutting dividends will provide cash to pay the new taxes. But making big cuts is penny-wise and pound-foolish, as they drive away investors, drive down share prices and leave companies with a far cheaper currency with which to raise needed capital.

The first two trusts to prove that dividend cuts weren’t inevitable with conversion were Bonterra Energy Corp (TSX: BNE, OTC: BNEFF) and Superior Plus Corp (TSX: SPB, OTC: SUUIF). Superior has since increased its payout. Bonterra reduced its dividend several times during the energy price crash of late 2008 but has raised it three times over the past year to the current level of CAD0.18 per share per month.

In contrast to the severe ups and downs of converters that cut, both of these companies’ shares have outperformed for several years. And their example has definitely not been lost on the rest of the trust universe. Mainly, cut-less conversions have become increasingly common. And even the cutters are doing what their underlying businesses permit to hold the line.

Conversions in Progress

That recent converters have followed the Bonterra-Superior model is clearly the first takeaway from the table “Clear Intentions.” The table lists the 19 trusts that have announced conversions and post-conversion dividend policies but have not yet completed the process.

Two companies on the list have actually increased distributions since announcing their moves: Baytex Energy Trust and Brookfield Renewable Power Fund. Baytex raised its payout ratio 50 percent at the time it announced its conversion, reflecting its success increasing reserves (165 percent of 2009 production replaced) and higher oil prices. Brookfield Renewable, meanwhile, increased its dividend after reporting robust fourth-quarter earnings from its carbon-neutral fleet of hydro- and wind-power plants.

Another 11 trusts have affirmed they’ll pay the same distributions after converting as they do now, with the promise of growth down the road as their businesses expand. Their ranks include several Portfolio picks: High Yield of the Month Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF), Just Energy Income Fund (TSX: JE-U, OTC: JUSTF), Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF), Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) and Vermilion Energy Trust (TSX: VET-U, OTC: VETMF).

Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) CFO Rohit Bhardwaj, meanwhile, confirmed during the company’s fourth-quarter conference call that management is “still very comfortable with our initial conclusion” and “sees no reason to convert.”

That’s because the lion’s share of the company’s business is outside Canada and is therefore not subject to the trust tax. Instead, its current plan is to remain a trust and absorb what it sees as a “worst case” of a tax “at the fund level (of) less than 10 percent.”

Affirmations of dividends by Enerplus and Vermilion are particularly remarkable in that energy production is an inherently volatile business. They indicate companies with superb prospects to sustain and increase output over time at low cost, as well as very low debt and low payout ratios.

Ditto Wajax Income Fund (TSX: WJX-U, OTC: WJXFF), whose three core distribution businesses of selling equipment, diesel engines and industrial components throughout Canada and the Western US have been rocked by the recession. Fourth-quarter distributable cash flow fell by more than half from 2008 levels. The company, however, reduced distributions last year by even more, putting it in exceptionally conservative position to hold the current rate and ride what it sees as an emerging recovery of its business.

As for the rest of the no-cutters, their ability to avoid dividend cuts reflects the long-term benefit of conservative financial policies that have limited debt and held payout ratios to sustainable levels. And they’re also thanks to core businesses–such as operating pipelines and fee-based energy infrastructure–that have proven their ability to generate steady cash flows, even in the worst economic circumstances.

For all 12 of these trusts, management wanted to maintain dividends after conversion and had the wherewithal to do so. In contrast, the six that have announced cuts also had the will to maintain as much of their dividends as possible with conversion but ultimately lacked the means to do so. All have announced post-conversion dividend cuts but only in relatively small amounts, particularly compared to the majority of trusts converting in 2008.

February High Yield of the Month Innergex Power is a very good example. The producer of hydro and wind power announced its conversion as part of a merger with parent and operator Innergex Renewable Energy (TSX: INE, INGXF). The deal, which will be voted on at a special meeting called for March 24, will add dramatically to Innergex’ asset base and future earnings power. That enabled management to limit the dividend cut to just 15 percent despite a consistently high payout ratio in recent years. The day after the announcement, Innergex units hit a new 52-week high and are up nearly 17 percent since.

Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) had no transforming deal to announce when it released its conversion plans last September. As a result, its distribution cut was considerably larger than Innergex’ at 37.1 percent, though the company elected to hold the old rate until the end of 2009. Not surprisingly, the cut triggered volatility in Macquarie’s share price. But after some initial selling, it’s now up in the neighborhood of 26 percent from its pre-announcement price.

Dividend cuts at Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF), Trilogy Energy (TSX: TET, OTC: TETFF) and Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) were all made necessary by the ill effects of the recession on their businesses. Boralex’ exposure to the depression in the timber industry through operating biomass plants is at last written off but not before damaging cash flow in advance of conversion. Trilogy, which has now completed its conversion to a corporation, was sandbagged by crashing natural gas prices (78 percent of output). Yellow Pages has maintained strength in its core directory business while expanding its Internet presence, but has been hit by the drop in advertising.

In all three cases, however, management strived to limit the damage to the payout as much as possible. Most remarkable is Trilogy’s action to cut its monthly payout by just 30 percent ahead of conversion. That’s a stark contrast to prior conversions by natural gas-focused producer trusts such as Advantage and Bellatrix Exploration (TSX: BXE-U, OTC: BLLXF), both of which eliminated distributions after converting. That’s as much a pro-dividend declaration by Trilogy as it is a demonstration that it’s a stronger company.

Arguably, the only trust on the list to announce a dividend cut that wasn’t less than expected is Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF). As I discuss in Dividend Watch List, the company’s cut from an annualized rate of CAD1.84 a share to CAD1.20 is exceptionally conservative, particularly considering the 10.1 percent growth in fourth-quarter adjusted income per unit and the 51.7 percent jump in net income per unit.

On the plus side, Davis + Henderson will maintain the current payout rate through 2010. The new rate is still generous at more than 7 percent based on current prices. And if the company’s growth initiatives continue to produce results, it will be easy to increase the payout from the post-conversion baseline.

Finally, the market’s lukewarm reaction to the company’s move is yet another caution to management of other trusts. Mainly, the market appeal of trusts–before and after converting to corporations–is dividends. Those who attempt to save a little money by cutting payouts to absorb new taxes will wind up costing themselves far more in the end, as a lower share price boosts their cost of capital and forces them to pass up opportunities for growth.

Two Ways to Play

This month I penned an article for my sector advisory Utility Forecaster on regulated utility mergers, highlighting two ways to play them. The highest-potential but lowest-percentage way is to try to pick prospective targets. The highest-percentage but lower-return way is to bet on the success of deals already announced but that are still trying to win needed regulatory approvals.

Making money this year off trust conversions is a similar endeavor, with one major difference: Virtually every Canadian trust will have to convert to a corporation by the time new taxes kick in.

Way No. 1 to profit from conversions is to correctly forecast which companies are going to surprise on the upside with their dividends as corporations. This is by far the highest-potential way to play conversions and, with the bar on post-conversion dividends still set very low, the odds of success are good.

Way No. 2 is to buy companies that have announced conversions and future dividends already, but whose share prices remain at a discount to ordinary corporations. Provided companies are able to execute on their dividend plans when they convert, we can expect those discounts to close–handing our picks solid capital gains in addition to their generous dividends.

The play is a skeptical market won’t fully price the stocks until the conversions are completed and dividends are officially set. The upshot: Investors have an opportunity to score windfall gains from ongoing conversions, even if they don’t want to take a chance on what management will do at trusts yet to declare their intentions.

The table “Expectations Beaters” shows 19 top plays on way one: trusts with strong odds of issuing post-conversion dividend guidance that tops expectations. Column two shows what I expect their actions to be, while column three shows what the market is likely expecting to see based on their current share price valuations.

Logically, all we need to see a solid capital gain in coming months is a post-conversion dividend projection that beats the expectation shown in the third column.

My view is all of these companies have the underlying business strengths to do so, particularly the 10 that are in the Canadian Edge Portfolio. Also, based on recent statements, management appears committed to holding as much of the payout as it can.

That combination should add up to high dividends and solid capital gains for each of this list of 19. There is one huge caveat, however: Unless you’re truly a long-distance mind-reader or have a seat on the board of one of these trusts, there’s absolutely no way to predict with certainty just what management will do.

In other words, a company with less secure prospects like Trilogy Energy can hand us a gain by electing to maintain more of its dividend than the market expects.

But as Davis + Henderson showed this week, even a company seemingly with everything going for it can announce a lackluster post-conversion dividend if management elects to be ultra-conservative.

The good news is odds certainly favor success with this list of 19 trusts. And even if they do cut dividends more than expected, the wise course will still be to hold them. All are backed by healthy and growing businesses that will consistently build wealth over time. Any near-term losses due to management moves on the post-conversion dividends will be erased as they continue to put up good numbers.

Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) management has hinted it will announce its post-conversion dividend policy in May. Based on comments made by management during its fourth-quarter conference call, a cut looks likely, and that’s well reflected in the current yield of 11.5 percent. But as I pointed out in the February High Yield of the Month, Bell’s fourth-quarter earnings were strong and 2010 will be another good year, as it realizes growth from its expanding fiber-to-the-home communications network. Buy Bell Aliant Regional Communications Income Fund up to USD27 if you haven’t already.

AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) is also priced for a big dividend cut, due mainly to management’s exceptionally conservative projection for a post-conversion dividend of CAD1.10 to CAD1.40 a share. Yet, as fourth-quarter earnings growth shows, it’s certainly capable of doing better than that, and risks of betting they will are low at current prices. Buy AltaGas Income Trust up to USD20.

CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF) and Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) remain pointedly vague on what their dividend policy will be after Jan. 1, 2011. Daylight has asserted its intention to convert to a “dividend paying corporation,” but has given no specifics. Meanwhile, CML has said only that it “sees no compelling reason to convert to a corporation prior to 2011” and that it will make decisions based on “delivering the greatest value for our investors consistent with our strategy.” (See Portfolio Update for CML’s and Daylight’s fourth-quarter details.)

Based on the numbers and forecasts for growth, both have the means to hold dividends steady, should they elect to convert. That’s enough reason for both to rate buys–CML Healthcare Income Fund to USD13, Daylight Resources Trust to USD11–but we have no way of knowing for certain what management will do.

That also goes for Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) and IBI Income Fund (TSX: IBG-U, OTC: IBIBF), neither of which will report fourth-quarter earnings until late March.

Both, however, are in the pink of health and rate buys up to USD33 and USD17, respectively.

As for ARC Energy Trust (TSX: AET-U, OTC: AETUF), Penn West Energy Trust (TSX: PWT-U, NYSE: PWE), Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) and Provident Energy Trust (TSX: PVE-U, NYSE: PVX), their ability to pay dividends ultimately depends on what happens to energy prices. All have proven their ability to survive very tough conditions, however, as fourth-quarter earnings posted by ARC and Penn West demonstrate. (See Portfolio Update.)

Management’s designs, however, are likely to prove the key factor determining how post-conversion payouts are set. Expectations are probably lowest for Penn West, in large part because of CEO William Andrew’s statement during the fourth-quarter conference call that he wants to “put a growth component into the story.” On the other hand, he also asserted during the call that “we’ve got to the point where we know we can…maintain the current distribution” and that the company can “ease into that growth.”

My take is that leaves a lot of room for upside surprises with the post-conversion dividend. In fact, with Penn West’s payout ratio sinking to just 52 percent in the fourth quarter, we might well hear a statement in its May conference call similar to that made by Enerplus’ CEO last month, i.e. affirming the current dividend rate provided oil and gas prices stay steady.

The bottom line with these energy trusts is they’ve survived the worst market conditions can throw at them, are exceptionally conservatively positioned financially, have rich reserves for development, and continue to sell at discounts to the value of their assets in the ground. That’s enough to make all of them solid buys for long-term investors, no matter what they do with their dividends.

It also limits downside risk if dividends are cut more than expected and it spells capital gains if they’re cut less than projected. They’re buys up to the prices in parentheses: ARC Energy Trust (USD22), Penn West Energy Trust (USD22), Peyto Energy Trust (USD14) and Provident Energy Trust (USD8). Peyto and Provident–which has settled its lawsuit with Quicksilver Resources (NYSE: KWK) amicably–will report earnings next week.

As for the non-Portfolio companies on the list, please observe the stated buy targets shown in How They Rate. Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF), Enbridge Income Fund (TSX: ENF-U, OTC: EBGUF), Liquor Stores Income Fund (TSX: LIQ-U, OTC: LQSIF) and Parkland Income Fund (TSX; PKI-U, OTC: PKIUF) all reported solid fourth-quarter and full-year 2009 earnings.

So did commodity price-sensitive Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF) and Canfor Pulp (TSX: CFX-U, OTC: CFPUF), which actually increased its payout by 50 percent at the same time.

Brookfield Real Estate Services Fund (TSX: BRE-U, OTC: BREUF), FutureMed Healthcare Income Fund (TSX: FMD-U, OTC: FMDHF) and North West Company Fund (TSX: NWF-U, OTC: NWTUF) will report fourth-quarter numbers later in the month. But with business steady and finances conservative, they, too, have what it takes to hold distributions steady after converting to corporations.

Again, the key question is will they, and it looks like we’re going to have to wait at least until May for the answers, and probably much later for some. Parkland’s management, for example, left everyone scratching their heads this week with a statement that its dividend as a corporation would be somewhere “between 75 and 110 percent” of the current annualized rate of CAD1.26 per share. In other words, investors will get something between a 25 percent cut and a 10 percent increase–quite a bit of territory.

Like the rest of this list, however, Parkland is also pricing in a much lower level of distributions, based on its yield of over 10 percent. That means the bar of expectations is low, maximizing potential gains from beating and limiting the risk if management gets too conservative.

Gains I Expect

What kind of gains can we expect from converting trusts going forward? One possible indication is the average return of roughly 63.1 percent posted by the 26 How They Rate trusts that have already completed conversions.

Admittedly, trusts that announced conversions in 2009 have benefited from the reviving Canadian stock market. But that average gain also reflects the fortunes of the nine trusts that announced conversions in 2008, a year when the broad-based S&P/Toronto Stock Exchange Income Trust Index lost nearly half its value in US dollar terms, which it’s yet to fully recover. Consequently, gains of that magnitude certainly aren’t out of the question, especially for trusts that elect not to cut post-conversion dividends.

The best gauge for where things could wind up is yields paid by corporations operating in the same industry. Dividend-paying stocks tend to be valued by their dividends, so it’s only natural to expect converted trusts to wind up selling at prices where their yields mirror those of corporate rivals.

Given the unique nature of oil and gas producer trusts–mainly their focus on highly predictable, mature reserves–it’s difficult to make direct comparisons between, for example, Penn West and Talisman Energy (TSX: TLM, NYSE: TLM). Talisman’s USD18.9 billion market capitalization is also twice Penn West’s USD8.7 billion. That also applies to comparisons between companies in other industries, from power to health care.

On the other hand, we can draw some pretty good inferences between trusts yet to convert to corporations and those that already have. The Canadian government ended the era of trusts when it passed the trust tax to take effect in 2011. What it didn’t repeal was investors’ desire for high yields and the yen of converting trusts’ managements’ to provide it.

The result: We’re seeing the ongoing creation of a whole new class of investment: companies that pay taxes but also outsized dividends to investors. The managers of this new class have discovered they can pay out big and grow their businesses by efficient use of capital. And they’re taking advantage of investors’ demand for yield to issue low-cost equity for everything from acquisitions to asset construction.

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. But they’re much higher than yields paid by traditional corporations on either side of the border.

They pay dividends in Canadian dollars, a currency that should continue to appreciate against the US dollar, thanks to Uncle Sam’s profligate ways and the fact that the loonie should follow the price of energy higher over time. Since there’s no way we’re going to see inflation without a rise in oil prices, the result is a very effective inflation hedge. Mainly, a rising loony automatically boosts the value of dividends paid by these companies to US investors, and it raises the value of principal as well.

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. Our contention remains that 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. (See Canadian Currents.)

What we’re seeing from most US brokers, however, is withholding will end when trusts convert to corporations. That adds 15 cents back to every 85 cents of net dividends paid, or 17.6 percent more income. Imagine–an effective dividend increase for US investors for any trust that converts to a corporation this year.

Again, returns on these converting trusts in the near term will depend heavily on what management does to dividends. But here’s how I see it.

This new class of dividend paying stocks will wind up sporting yields on average of 6 to 8 percent. The “Expectations Beaters” right now yield anywhere from 8 to 12 percent. That’s implies some pretty substantial gains, and the more a dividend holds the bigger the gain.

Meanwhile, the “Clear Intentions” trusts have appreciated on average around 22.4 percent. That’s barely a third what already converted trusts have and implies considerable upside as management follows through on its stated strategies. See How They Rate for my buy targets on each.