Editor’s Note: In Brief is the executive summary that introduces every issue of Canadian Edge. Please use it as a guide to points of interest.

After months of loving only bonds, it looks like yield-focused investors are increasingly willing to look at dividend-paying stocks. The result is a rapidly unfolding second leg up for Canadian Edge Portfolio picks in the rally that began in March 2009.

Several of my recommendations have reached new all-time highs over the past few weeks. They’ve recovered all the ground lost during the debacle of 2008-09 as well as the damage from the Halloween 2006 trust tax announcement–and they’ve pushed well beyond.

Best of all, Ag Growth International (TSX: AFN, OTC: AGGZF), Atlantic Power Corp (TSX: ATP, NYSE: AT), Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF), Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF), Colabor Group (TSX: GCL, OTC: COLFF), Keyera Facilities Income Fund (TSX: KEY, OTC: KEYUF), Northern Property REIT (TSX: NPR-U, OTC: NPRUF), Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF) and Vermilion Energy Trust (TSX: VET, OTC: VETMF) are extremely healthy companies with plenty of upside going forward. That’s provided, of course, that investors buy below my target prices.

It’s also true for the remaining score or so of CE Portfolio companies, all of which have posted strong gains during the rally but haven’t gone quite as far or as fast. In fact, I fully expect to see new all-time highs for several other picks before the year is out, including Artis REIT (TSX: AX-U, OTEC: ARESF), Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF) and RioCan REIT (TSX: REI-U, OTC: RIOCF), and possibly Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) and Just Energy Income Fund (TSX: JE-U, OTC: JUSTF).

Portfolio holdings that depend on the ebb and flow of energy prices probably won’t recover the highs of mid-2008 until oil and particularly natural gas prices are at much higher levels. All our Aggressive Holdings, however, have certainly proven they can weather some dramatic ups and downs. And even the most speculative–Perpetual Energy (TSX: PMT, OTC: PMGYF)–is both well hedged against further price weakness and set to grow cash flows with solid production and falling costs, even if prices fail to rise.

If we’ve learned one thing over the past two years as investors, it should be that stocks backed by strong businesses recover from even the worst crackups. Over the past four years, Canadian Edge recommendations have weathered about the worst series of unfortunate events ever faced by any of the market sector, from a nasty tax surprise to crashing natural resource prices and the most sudden and severe global credit crunch in 80 years.

Now they’re ready to grow again, and the prospect is only partly reflected in today’s share prices. Percentage yields offered by companies are lower than even a few months ago, mostly due to share price gains but also because of conversion-related dividend reductions. But they’re still two times–and more–that which companies of equivalent quality offer in the US. And they’re paid in Canadian dollars, a currency that’s pegged to natural resource prices and is therefore recession-resistant.

The result is a still very compelling combination of high business quality, potential growth and high yield for our favorites. But again, it only makes sense if you’re able to purchase at or below my buy targets.

Why is this so important? Simply, this is still one of the most emotional markets in memory. Up until recently dividend-paying stocks lagged bonds badly, as investors worried about everything from European government debt and Asian commodity inventories to the latest US economic minutiae.

Now, suddenly, many seem to have lost their fear and are willing to buy almost anything paying a high dividend.

Their buying power is giving these high-quality Portfolio companies at least some of the respect they deserve. But make no mistake: Whether institution or individual this type of investor has little or no staying power. The US economy is improving, but it’s hardly in the pink of health.

Slightly better news on growth or optimism for a political change in Washington may be making people more optimistic now. But as we’ve seen time and again over the past two years, the market mood can shift on a dime, triggering vicious selloffs.

My view is we’re in the same market we’ve been in since mid-2008. That is, when the panic level rises and prices drop, it’s time to play offense and buy. Conversely, when the fearful try to come back, it’s time to play defense. That doesn’t mean selling out of good positions now. But it does mean sticking to the discipline of buy targets when everyone else is yield crazy.

Remember: The lower your buy price, the higher your yield. Those who chase usually lose out.

Portfolio Action

This month’s Portfolio Update theme is dividends and what we can expect from our favorites going forward in the post-income trust era. I highlight the most attractive recommendations to buy and now and also look at when we can expect to start seeing earnings numbers. I’ll be reporting these in Flash Alerts as they occur, with a major review in the November issue.

As was the case last month, I’m adding a company to the Aggressive Holdings: High Yield of the Month Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF). The owner and operator of pulp mills in Canada is in the sweet spot of its global market, thanks to robust demand for softwood pulp. That’s likely to continue for a while, even if the US market remains relatively weak.

The company also has a very aggressive payout policy that’s likely to continue well beyond its planned conversion to a corporation in January 2011. Although I don’t expect the 20 percent it’s currently paying to last, there will be enough income to more than justify my long-time buy price on Canfor Pulp Income Fund of USD15.

As for the rest of the Portfolio, Pembina Pipeline Income Fund is now Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF). As noted in the parentheses, the symbols have changed both for the TSX and OTC markets. Ownership and investor dividends, however, are exactly the same as when Pembina was an income trust, and each former unit has been swapped for a share of the new company. Pembina Pipeline Corp is a buy up to my new, higher target price of USD20.

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) and Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) have now announced their post-conversion distribution policies. As expected, both made substantial reductions, mainly because of ambitious capital spending plans.

Lower yields are likely to make them less attractive to some investors. But both stocks have rallied sharply since their announcements, providing a decent time to cash out. I’ll be keeping both in the Portfolio, however, as higher prices and successful production will bring rising cash flow, dividends and share prices going forward.

And late Wednesday evening Provident Energy Trust (TSX: PVE-U, NYSE: PVX) announced a 25 percent distribution cut to coincide with its Jan. 1, 2011, conversion. The reduction is well within expectations and sets the company up as a solid pure play on natural gas liquids that will still pay 7.5 percent based on Wednesday’s closing price.

Note that of all the CE Portfolio Holdings only ARC Energy Trust (TSX: AET-U OTC: AETUF), IBI Income Fund (TSX: IBG-U, OTC: IBIBF) and Parkland Income Fund (TSX: PKI-U, OTC: PKIUF) have yet to announce their post-conversion dividend rates. I expect most, if not all four of them, to announce prospective payouts along with third-quarter numbers.

ARC and Parkland are the least likely to cut by a significant amount, despite exposure to energy price volatility. But ultimately the decision is up to management and is therefore unpredictable.

High Yield of the Month

The October High Yield of the Month picks are both Aggressive Holdings, as commodity prices play a very large role in their profitability. One is a longtime holding and very effective antidote to the lower distributions paid by many oil and gas producers after converting from income trusts to corporations, Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF).

Enerplus confirmed last month that it has the power to convert to a corporation without cutting its distribution, hold debt to industry-low levels and continue to invest effectively in a superior portfolio of long-life properties, including the Bakken light oil play and Marcellus shale. Buy Enerplus Resources Fund up to my new target of USD28 if you haven’t yet.

The other HYOTM is the highest-yielding stock I’ve ever recommended in a model portfolio, Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF). After boosting its distribution 13.6 percent last month, the owner/operator of pulp mills now yields more than 20 percent. In my view, that’s certain to be cut when Canfor converts to a corporation and starts paying taxes. Management, however, is adamant it will continue to pay out the same proportion of its after-tax income as a corporation that it’s doing now as a trust.

As long as global softwood pulp markets remain reasonably healthy, there will be a sizeable payout. I’ve rated Canfor Pulp Income Fund a buy up to USD15 for some time in How They Rate; that remains my target price.

How They Rate

How They Rate has automatically updated US dollar unit/share prices, dividend payment rates in US dollars, yields, most recent dividend dates, dividend frequency and debt-to-capital ratios. Information on trust conversions is included regularly in a separate table, accessible in the Income Trust Tax Guide.  We’ll be updating this information regularly as new conversions are announced. Information on US taxation of How They Rate companies will now be included in the table on a regular basis.

CE Safety Ratings are based on six operating and financial criteria. Companies meeting all six criteria are rated my highest rating of “6.” “0” is the lowest rating, indicating companies that meet no safety criteria. Safety criteria are described in the text below the How They Rate table and are as follows:

• One point if the payout ratio meets “very safe” criteria for the sector.
• One point if the payout ratio is not “at risk” based on the criteria for its sector.
• One point if the debt-to-assets ratio meets “very safe” criteria for the sector.
• One point if the company is 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.
• One point if the company’s primary business is recession resistant. Qualifying varies from company to company, though virtually all Electric Power and Energy Infrastructure companies qualify, while no Energy Services companies do.
• One point if the company’s profitability is not directly affected by changes in commodity prices.

I list trusts, funds and high-yielding corporations by the following sectors:

• Oil and Gas–All producer trusts are included here.
• Electric Power–Power generators.
• Gas/Propane–A mixture of distributors, from propane to packaged ice.
• Business Trusts–A range of businesses involved principally with consumers.
• REITs–All qualified real estate investment trusts.
• Trust Mutual Funds–Closed-end funds holding portfolios of individual trusts.
• Natural Resources–Trusts and corporations that produce resources and raw materials other than oil and gas.
• Energy Services–Trusts and corporations whose main business is providing drilling, environmental or other services to energy producers.
• Energy Infrastructure–Trusts and corporations that own primarily pipelines, processing facilities and other fee-generating assets.
• Information Technology–Trusts and corporations that provide communications, newspaper, directory and other information services.
• Financial Services–Canada’s banks, investment houses and other trusts and corporations feeding that business.
• Food and Hospitality–Trusts and corporations that franchise restaurants, own and operate hotels and manufacture and distribute food and beverages.
• Health Care–Trusts and corporations involved in the medical care and/or supply business.
• Transports–Trusts and corporations that ship freight and move passengers by bus, truck, rail or air.

Additions and Subtractions

There are two changes to How They Rate coverage this month. First, I’m replacing Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF) with its parent and now 73 percent owner Boralex Inc (TSX: BLX, OTC: BRLBF). O’Leary Funds Management is still refusing to tender its units of the income fund and is challenging the takeover in court as a “substantial violation of the rights of minority investors.” Boralex Inc, however, has now paid for the tendered units, which have increased its ownership from 22 to 73 percent at last count. That gives the company effective control over the income fund as well as a sufficient number of votes to carry out what’s likely to be a mandatory subsequent acquisition transaction to be voted on at a special shareholder meeting Oct. 21.

There’s a possibility the O’Leary Funds could convince the courts to block a mandatory bid for the units it controls. But at 73 percent ownership, Boralex Inc is now the more interesting company to follow, despite its lack of a dividend. Selling for just 97 percent of book value, Boralex Inc is a buy up to USD8.

I’m also adding Whiterock REIT (TSX: WRK-U, WRKUF) to coverage. The owner of office, industrial and retail properties in Canada yields nearly 10 percent, even after a solid gain this year. Funds from operations were up 9.3 percent in its second quarter, representing a payout ratio of 91.1 percent. Same-property net operating income was up 2.8 percent sequentially from the first quarter. Occupancy rose to 95.9 percent, and debt was reduced to 60.3 percent of book value, down from 71.1 percent a year ago even as the REIT completed several major acquisitions.

I’m starting Whiterock REIT out as a hold, pending third-quarter earnings, which should be out on or about Nov. 5.

Note that Provident Energy Trust (TSX: PVE-U, NYSE: PVX) was moved last month to Energy Infrastructure to reflect the fact that it’s now a pure midstream energy company. Also, several trusts successfully converted to corporations over the past month. The tip off is there is no longer a “-U” or “.UN” suffix attached to their Toronto Stock Exchange (TSX) symbols. Converted corporations’ dividends are no longer being withheld 15 percent by the Canadian government if they’re held in IRA and other tax deferred accounts that prevent filing a Form 1116.

Advice Changes

Here are advice changes. See How They Rate for other changes in buy targets.

Cathedral Energy Services (TSX: CET, OTC: CEUNF)–Buy @ 6 to Hold. Buyers have pushed up the energy services company’s share price but business conditions remain very weak and the yield is too low to be truly attractive.

Clearwater Seafoods Income Fund (CLR-U, OTC: CWFOF)–Hold to SELL. Management made a recent debt refinancing sound like a triumph. But the seafood trust will still have to pay a 10.5 percent interest rate to partially extend a bond maturity three months, up from a previous 6.7 percent. That’s a survival move if there ever was one, particularly with corporate borrowing rates the lowest in 40-plus years.

Inter Pipeline LP (TSX: IPL, OTC: IPPLF)–Buy @ 12 to Hold. Canadian limited partnerships are generally off limits to US investors. But even those who can buy in are better off elsewhere with the owner of energy infrastructure trading well above my former buy target.

Medical Facilities Corp (TSX: DR-U, OTC: MFCSF)–Hold to Buy @ 10. Pressure to cut profits at US hospitals is less likely to come from the federal government after November elections. Also, the high yield will not be affected by trust taxation in 2011 and is pricing in a great deal of risk.

Morguard REIT (TSX: MRT-U, OTC: MGRUF)–Buy @ 12 to Hold. This REIT is solid but has moved well above my buy target. It’s a hold, though it may become a buy again if third-quarter results are strong enough.

Trilogy Energy (TSX: TET, OTC: TETZF)–Buy @ 10 to Hold. This natural gas-focused producer has appreciated almost 15 percent above my buy target. That’s despite weak gas prices and unexpectedly high recent drilling costs. There are better buys in gas.

Wajax Income Fund (TSX: WJX-U, OTC: WJXFF)–Buy @ 22 to Hold. Strong second-quarter earnings catapulted units well past my buy price. And despite the promise of solid returns and a successful conversion to a corporation in 2011, the secondary offering of the company’s units by former parent Empire Company Ltd (TSX: EMP.A, OTC: EMLAF) has confirmed insiders are taking profits.

Ratings Changes

Here are CE Safety Rating changes. Note there will almost certainly be others as third-quarter earnings are announced as well as when the remaining unconverted trusts announce post-conversion dividend policies.

Labrador Iron Ore Royalty Company (TSX: LIF-U, OTC: LIFZF)–1 to 2. The iron ore business is still volatile and very dependent on Asian demand for steel. But by swapping trust units for a staple share paying a dividend comprised of debt interest (46.8 percent) and equity dividend (53.2 percent), Labrador has eliminated 2011 risk for investors. In fact, based on a quarterly dividend comprised of CAD0.50 regular cash and CAD0.50 “special cash,” the effective indicated yield is a tidy 7.4 percent.

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–3 to 4. The oil-weighted producer trust announced a steep, 40 percent distribution reduction that will take effect in January, when it converts to a corporation. But as I pointed out in a Flash Alert last month, it’s also positioned for strong growth and in any case now satisfies another CE ratings criterion, i.e. a settled post-conversion dividend policy.

Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–2 to 3. The natural gas-weighted producer trust will cut its distribution 50 percent in Jan. 2011 when it converts to a corporation. The saved cash flow, however, will make possible a ramping up of capital spending that will keep production growing rapidly. And setting a post-conversion dividend earns it another point in the CE Safety Rating System.

Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–3 to 4. Provident’s announcement of its post-conversion dividend removes all remaining uncertainty regarding 2011 as well as its now completed restructuring as a pure play on natural gas liquids infrastructure and related services. The dividend will still be a generous 7.5 percent based on current prices after the conversion and there’s room for upside as well as takeover potential. It’s a buy up to USD8.

Swiss Water Decaf Coffee Income Fund (TSX: SWS-U, OTC: SWSSF)–2 to 3. The specialty coffee products company will cut its distribution by 30.6 percent when it converts to a corporation on Jan. 1, 2011. That eliminates uncertainty about 2011 taxation, though it’s hardly a welcome development for long-suffering unitholders.

Westshore Terminals Income Fund (TSX: WTE-U, OTC: WTSHF)–3 to 4. The operator of a coal storage and loading terminal in British Columbia pays a volatile dividend that depends heavily on the price of metallurgical coal produced by its major customer Teck Resources (TSX: TCK/B, NYSE: TCK). But its plan to convert from trust to staple share eliminates 2011 taxation risk. In fact, strong coal prices mean more dividend boosts like ahead, like the 12.2 percent sequential hike to a quarterly rate of 46 cents Canadian per unit in the upcoming Oct. 15 payment.

Feature Article

The takeover offer for Potash Corp of Saskatchewan (TSX: POT, NYSE: POT) by Australian resource giant BHP Billiton (NYSE: BHP) demonstrates once again that plentiful energy is far from Canada’s only natural resource attraction. In fact, the country features abundant reserves of scores of resources that are even more valuable to the Asia markets driving the ongoing global resource boom.

I highlight the top plays from organics like timber and the raw elements of fertilizer to vital industrial materials like iron ore, coal and uranium. And I look once again at the safest way to play these companies–i.e. high-yielding bets on the infrastructure that brings their product to market.

Canadian Currents

Telecommunications in the 21st century is about adding customers and increasing average revenue per unit (ARPU), preferably at the same time. This feat is accomplished by maintaining and constantly up-selling your customer base on an ever-increasing menu of offerings.

The game is on to merge service with content. Here’s the latest on a series of transactions and potential deals that will change the face of Canada’s telecom industry.

Tips on Trusts

This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide “Subscriber Tips” section.

Dividend Watch List–Four more companies in the Canadian Edge coverage universe announced distribution cuts. All three were directly tied to plans to convert from income trusts to corporations: Penn West Energy Trust (TSX: PWT-U, NYSE: PWE), Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF), Provident Energy Trust (TSX: PVE-U, NYSE: PVX) and Swiss Water Decaf Coffee Income Fund (TSX: SWS-U, OTC: SWSSF). I explain why investors should stick with the first three despite the lower payout going forward and why Swiss Water is still worth shunning.

As I’ve noted here before, the regular Watch List continues to exclude trusts yet to announce post-conversion dividend policies. Again, these are at the discretion of management and are impossible to truly predict. Portfolio companies yet to announce conversion policies are listed at the bottom of Portfolio Update. A table showing post-conversion dividend policies for all companies in How They Rate coverage is available in the Income Trust Tax Guide.

• Boston Pizza Royalties Income Fund (TSX: BPF-U, OTC: BPZZF)
• Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF)
• FP Newspapers Income Fund (TSX: FP-U, OTC: FPNUF)
• Interrent REIT (TSX: IIP-U, OTC: IIPZF)
• Royal Host REIT (TSX: RYL-U, OTC: ROYHF)
• Superior Plus Corp (TSX: SPB, OTC: SUUIF)

Bay Street Beat–How the Canadian analyst community views trusts, including our favorite trusts.

How to Fix Improper Withholding–It’s clear from the e-mail we’ve received requesting copies of the “Karzon Letter”–discussed here in a re-run of the September Canadian Currents article–that many of you continue to suffer because of bureaucratic inertia. This information may provide the impetus the responsible parties need to get moving–and to get you the dividend you’re entitled to.

For More

How They Rate offers several free links. Clicking on the Toronto Stock Exchange (TSX) symbol will now take you directly to the Google Finance page for every How They Rate holding.

We also offer a live, intraday quote feed in US dollar prices, distributions and percentage yields of trusts and high-yielding corporations. Note that our quote service sometimes includes special annual distributions along with the regular monthly payments.

Clicking on the US symbol of a company takes you to a chronological listing of every Canadian Edge and Maple Leaf Memo article in which that trust has been featured. You can also use that page to access articles on other trusts by typing in the relevant exchange and symbol in the “Search Query” box at the top of the page.

For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on dividend paying equities. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission. The Toronto Globe & Mail features the “Globe Investor” section with all the latest news. Dominion Bond Rating Service is the pre-eminent credit rater in Canada. The Bank of Canada has a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.

How They Rate can now be accessed several places on the Home Page. The Income Trust Tax Guide has backup to file distributions as “qualified dividends.” Find it on the top bar on the Home Page under the subhead Resources. Eye on Trusts and How They Rate are accessible on the shaded box in the middle column.

Editor’s Note: For additional information on this topic, check out Roger Conrad’s latest report on Top Canadian Income Trusts.

Roger Conrad
Editor, Canadian Edge