August’s High Yield of the Month selections–Parkland Income Fund (TSX: PKI-U, OTC: PKIUF) and Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–yield 11.8 and 14.3 percent, respectively. And current distribution rates are set to hold the rest of the year, when both trusts will convert to corporations.

After that, Parkland has set a target payout of 75 to 110 percent of its current monthly rate of CAD0.105. As a result, it will pay out at least 8.9 percent, possibly as much as 13 percent, based on its current price. Yellow Pages, meanwhile, has set an annualized rate of CAD0.65, or an 11.6 percent payout based on its current price.

Those yields are well above those paid by the average dividend-paying utility, for example. So obviously, investors are highly skeptical they can be maintained. In both cases, however, the fear runs a lot deeper than reality warrants. In fact, those yields look as solid as anything on the market.

Parkland won’t announce its second quarter results until later this month. The marketer and distributor of fuel products to rural areas clearly proved, however, its ability to grow consistently in the toughest of environments. The acquisition of Bluewave Energy earlier this year, for example, made the company the largest independent fuel marketer in Canada. And the implementation of a new integration system promises more deals as well as internal savings and synergies.

Chances are you haven’t heard of Parkland unless your business has purchased fuel products in the back country of western Canada. But the company now operates a profitable niche of 622 multi-branded convenience stores and wholesale distribution centers in rural areas coast to coast, stretching into remote reaches of the Yukon and Northwest Territories. The company’s commercial business supplies bulk fuel, propane, heating oil, lubricants, industrial fuels and agricultural inputs under a half dozen popular brands. And it provides contract processing services for specialty petroleum products as well.

Parkland’s first-quarter cash flow was clipped 32 percent, owing mainly to seasonal factors affecting margins and weather. Volumes, however, rose 21 percent to 5 percent of total Canadian consumption. That reflects the pace of recent acquisitions, which have recently extended into Ontario and Atlantic Canada via the Bluewave deal. And it will translate into surging cash flow as the North American economy recovers and weather patterns normalize.

Meanwhile, management continues to focus on cost controls, particularly information system upgrades that will better integrate distribution and identify expansion opportunities. This has also required no small effort and cost. But now mostly in place, it should enable even faster growth as the company continues to consolidate this still very fragmented industry.

Despite these challenges, Parkland still managed to cover its monthly distribution by a comfortable 1.15-to-1 margin. Despite the acquisitions, there are no significant refinancing needs until 2012, and the company has had no problem raising cash when needed.

The upshot is a combination of robust and reliable growth potential and a high and sustainable yield selling at a modest valuation of 24 percent of sales. I’ve recommended Parkland as a buy periodically since picking up How They Rate coverage several years ago. Parkland’s all-time high above USD17 was established nearly a year after the tax on trusts was announced, in Oct. 2007.

They’re still well below the highs though they’ve more than doubled off the late-2008 low. One reason is concern about the North American economy and energy prices. The other is uncertainty about what management will do with its dividend when it converts from trust to corporation.

Both worries are overblown, making now an ideal time to pick up Parkland Income Fund below my buy target of USD13.

Investor skepticism about Yellow Pages is understandable, given the bankruptcies of both major US telephone directory companies. Like traditional phone service, print directories continue to shrink as consumers increasingly use their smart phones to locate businesses. And Yellow’s management has been forced to backtrack from its late 2006 pledge to maintain its distribution after converting to a corporation.

As we’ve pointed out repeatedly here, however, this isn’t your typical directory company. Rather, from the moment it was spun off from BCE (NYSE: BCE) to Bain Capital nearly a decade ago, Yellow Pages has aggressively pursued Internet advertising, even as it has locked up almost all of Canada’s print directories with low-cost acquisitions.

Bottom-line distributable cash flow (DCF) for second quarter 2010 came in at CAD0.35 per share, flat with last year’s tally and providing comfortable dividend coverage of 1.75-to-1. That coverage rises to nearly 2.2-to-1 if it’s based on the post-corporate conversion rate of CAD0.65 per year. Consolidated revenue and cash flow excluding one-time items were also almost dead even with the second quarter of 2009.

Those headline numbers, however, mask the successful transformation of Yellow Pages from a 20th century print directory business to a 21st century integrated advertising operation utilizing all modes of media. Online revenue in the second quarter 2010 hit CAD107.7 million, more than a quarter of overall sales. These include everything from adaptations of general business directories to the web to advanced services and specialty offerings, such as automotive and housing web and print-based publications.

The acquisition of Canpages for CAD225 million finalized in late June will further expand the company’s sales force for digital advertising. Canpages.ca has a national residential and business database that it reaches with 84 publications and has averaged more than 3.5 million unique visitors a month, with local search requests.  Last month, Yellow announced it would buy CanadianDriver.com, further boosting its presence in the automotive space with what’s acknowledged as Canada’s leading resource on new car reviews, test drives and related topics.

Transitioning from print to web hasn’t always been smooth. The Trader publications acquired to boost the company’s “vertical media” offerings were particularly hard hit by the recession, forcing management to cut operating costs even as it worked to deal with a heavy debt load left over from the purchases. The company has also had to deal with its customers’ concerns about the economy, which has limited their advertising spending more than during past recoveries.

The core directories business, however, continues to grow, with revenue rising 4.3 percent as what’s been lost in print has been more than made up for on the web. And it’s more profitable than ever, as demonstrated by the jump in cash flow margin to 58.6 percent from 57.7 percent last year. Even Trader is turning around, with revenue rising 21.8 percent on acquisitions and, in management’s words, “cyclical revenue pressures receding.”

As for Yellow’s debt load, the company has no significant maturities until 2013. And outside of acquisitions, cash flows more than cover needed capital spending. The cash position will improve further in 2011, as the distribution is reduced roughly 18.8 percent and online revenue growth is expected to accelerate from 18 to 25 percent.

The company has set an earnings per share target of CAD0.95 to CAD1 for 2011, which would leave plenty of room after dividends for further expansion. As I’ve said, my mistake with Yellow Pages was not anticipating how cyclical its business would be after the Trader purchase, which occurred prior to the 2008 meltdown. At this point, however, business is turning up once again. Buy Yellow Pages Income Fund up to USD8 if you haven’t already.

What can go wrong for Parkland and Yellow? An economic relapse in Canada would certainly keep business soft. Management of both companies, however, has been consistently cautious in their outlook and strategy on this score, focusing their growth plans squarely on what they can control. And neither has relied overly on leverage, as neither has refinancing needs for at least the next 18 months.

Both stocks were hit hard during the 2008 meltdown and would likely be damaged again if the market did hit a second down-leg as many fear. But conservative financial policies enabled Parkland to hold its dividend rate steady throughout the 2008 debacle and the recession that followed. And while Yellow did cut once in May 2009, it’s consistently produced enough cash flow to cover its old rate. Rather, it’s used the savings to grow the company and strengthen its balance sheet.

The bottom line is both companies’ underlying businesses stayed solid during the worst credit crunch, recession and market meltdown in 80 years. And there’s no better indication that they’ll survive whatever is thrown at them this year.

For more information on Parkland and Yellow Pages, see How They Rate. Click on the TSX symbol to go to their Google Finance pages for a wealth of information, ranging from news releases to price charts. These are substantial companies that trade frequently in both the US and Canada. Parkland is smaller at a market cap of CAD594 million. Yellow is substantial at CAD2.858 billion.

Some states have “blue sky” laws that may not allow your broker to pitch these trusts to you. Those laws, however, don’t prevent you from placing the order. If your broker won’t take the trade, take your business somewhere else. US investors are generally not permitted to take part in secondary offerings, but that has nothing to do with shares that are already traded either on the Toronto Stock Exchange or over the counter (OTC) in the US.

Click on the trusts’ names to go directly to their websites. Parkland is listed under Gas/Propane, while Yellow can be found under Information Technology. Click on their US symbols to see all previous writeups in Canadian Edge and its weekly companion Maple Leaf Memo. Note Yellow has been in the Portfolio for several years, while Parkland is a new addition to the Aggressive Holdings.

Distributions paid by both companies are considered 100 percent qualified for US tax purposes. Tax information to use as backup for US filing–whether or not there are errors on your 1099–is available in the 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 to US investors at the border. If you hold these trusts outside an IRA, the 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 generally be carried forward to future years. Form 1116 recovery will also be possible after the trusts convert to corporations.