Do you have time for total returns? Many investors I’ve spoken with, particularly seniors, say they don’t. Rather, they contend they need to get all they can through high yield now.

That’s understandable, given the sorry performance of the S&P 500–the world’s best-known stock index–over the past decade or so. The big cap benchmark returned just 0.8 percent over that time. You’d have been just as well off in cash, and probably would have slept a lot better, too.

On the other hand, chasing yield alone has never been a good strategy. In fact, during the market meltdown of 2008-09 many seemingly attractive cash cows were slaughtered along with their investors, including more than a few ill-conceived Canadian income trusts.

What have come back from that debacle are dividend-paying equities backed by companies with strong underlying businesses. The S&P/Toronto Stock Exchange Income Trust Index (SPRTCM) is still well off its August 2006 high of 175. But it’s once again broken into the 140s, up from a low of 78 on Mar. 6, 2009.

Meanwhile, the following Canadian Edge Portfolio picks have all made new all-time highs this autumn:

• Ag Growth International (TSX: AFN, OTC: AGGZF)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)
• Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF)
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)
• Colabor Group (TSX: GCL, OTC: COLFF)
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF).

And most of the rest are trading at levels not seen since prior to the 2008 crash.

High yields have played a huge role in these companies’ renaissance. But that was only possible because the underlying businesses supported those payouts through the worst credit/economic/market meltdown in 80 years.

Their share prices took a hit in Nov. 2006, following Finance Minister Jim Flaherty’s Halloween announcement of a 2011 tax on income trusts. And they took an even bigger one when a rotten US banking system nearly pulled the world down in late 2008. Their underlying businesses, however, kept doing what they do best: making money and paying dividends.

Like the North American economy, the stock market in Canada and the US still has a long way to go to get back to mid-’00s glory. But as the market mood has improved, these companies’ market value has steadily risen, as investors have come to recognize their underlying strengths.

These companies’ yields were steady throughout. But only the continuing ability to pay those dividends ensured the ultimate recovery. And the share price gains we’ve seen since March 2009 have dwarfed cash received from distributions as well.

My point is no one can afford to overlook total return when they invest in dividend-paying stocks. And that’s true whether your need is a lot of cash up front in the form of a big yield, an investment you can sleep with at night, or something that will produce a capital gain.

The converse is that a sweet yield can bring sour consequences, again unless it’s backed by a healthy business. An extra 2 to 3 percentage points’ worth of yield is basically a risk premium. If things don’t go your way, you can lose several times that in a single day, and much more thereafter.

That’s not to say high yields aren’t worth chasing sometimes. In fact, that’s exactly what I’m doing by featuring Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF) as a November High Yield of the Month and adding it to the Aggressive Holdings. But such moves are not without risk, and it’s critical that investors understand what they are before jumping in.

As I’ve noted before, I basically advise building your Canadian portfolio in one of two ways. Both require you first decide how many companies you want to buy into and how much money you want to commit. I generally advise eight to 10 selections, chosen according to how much risk you’re comfortable with taking.

Those interested purely in yield and steady total returns with as little risk as possible should stick with the Conservative Holdings. Those willing to take on more risk by betting on commodity prices and economic growth–in exchange for higher yield and more rapid growth potential–will do best by focusing on the Aggressive Holdings.

Once you’ve decided what kind of companies you want to own, the next step is settling on one of two strategies to buy them. The easiest way is to simply buy the companies recommended as High Yields of the Month, which represent the best buys in the issue based on prices and prospects. Investors who want to focus on only Conservative or Aggressive Holdings will have one selection to add per month. Those in search of a balance can buy both.

The second way to buy into the Portfolio is to simply pick out a group of eight to 10 companies that appeal to you and buy them in three increments. Place one third of your planned investment now, another third a month from now, and a final third a month after that.

Try to buy in roughly equal dollar amounts for each holding to avoid initial overweighting, and thereby exposure to an unexpected problem at a single company.

Either way you choose, US investors should refrain from putting more than 25 percent or so of their total portfolio into Canada, with the exception of those planning on moving there.

That’s because all Canadian investments’ market value and dividends fluctuate with the ups and downs of the Canadian dollar.

As “Loonie = Greenback” shows, that’s been a good thing lately–and my feeling is it will be for many years to come. Canada has a far superior balance of trade, fiscal balance and banking system to the US at this juncture. And its resource exports are in rising demand, particularly in Asia. The currency is also a follower of oil prices, which also look set to go higher in coming years.

If these trends continue as I expect, the Canadian dollar is headed a lot higher against the US in coming years, though Ottawa will try to slow its rise to avoid economic dislocation. That makes it a great hedge against potential US inflation, as well as a possible US dollar crisis.

On the other hand, if you pay your bills in US dollars, a surprise rise in the greenback versus the loonie will be a real problem if you have all your income-generating investments in Canadian dollars. Diversification has never been more important for income investors, among countries as well as stocks and sectors.

In other words, don’t abandon sound portfolio principles just because someone has made you afraid of some impending macroeconomic or political catastrophe. Just focus on owning a balanced portfolio of dividend-paying equities backed by strong businesses.

Helping you do that in Canada is my primary goal at Canadian Edge. Below, I look at 2011 trust conversions and third-quarter earnings results, two key factors that are critical for determining when companies measure up and when they don’t.

The Numbers

Here are the particulars for Canadian Edge Portfolio companies that as of Friday morning had announced third-quarter earnings numbers. Note that Colabor Group (TSX: GCL, OTC: COLFF) is reviewed in the October Portfolio Update.

Canfor Pulp Income Fund’s (TSX: CFX-U, OTC: CFPUF) numbers were spotlighted in an Oct. 26 Flash Alert. I have more on Canfor below, including what to do about a possible complication arising from its planned conversion to a corporation.

The numbers for new Aggressive Holding Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF) and RioCan REIT (TSX: REI-U, OTC: RIOCF) are the subject of the November High Yield of the Month. All four companies are buys at the prices listed in the Portfolio table.

Finally, ARC Energy Trust (TSX: AET-U, OTC: AETUF), Daylight Energy Ltd (TSX: DAY, OTC: DAYYF), Newalta Corp (TSX: NAL, OTC: NWLTF) and Phoenix Technology Income Fund (TSX: PHX-U, OTC: PHXHF) are all discussed in this month’s Feature Article. You’ll also find the best of the rest of Canada’s oil and gas patch there, and what to watch out for with my remaining energy producer picks.

Starting with the Conservative Holdings, AltaGas Ltd (TSX: ALA, OTC: ATGFF) continues to successfully build its portfolio of gas and power assets.

On Nov. 4 the company announced a deal with EnCana Corp (TSX: ECA, NYSE: ECA) to construct and operate a gas processing facility and related gathering network in Alberta.

The CAD235 million project is expected to enter service in late 2012, when it will be supplied by EnCana’s wells and capable of processing 120 thousand cubic feet per day of gas. Facilities will also be equipped to capture natural gas liquids.

In the meantime, the company completed several cash-generating projects during the third quarter, including a 13 megawatt gas-fired cogeneration power plant in Alberta, a gas processing plant serving the Montney Shale area, a coalbed methane processing facility in Alberta and a gas distribution pipeline in Nova Scotia. All will begin adding to earnings in the fourth quarter.

The third quarter was AltaGas’ first as a converted corporation. On the plus side, cash flow from operations rose 61 percent and covered the distribution by better than 2-to-1. On the minus side, weak power prices had an impact on the company’s unhedged output. But that was offset by the growing portion of the business based on renewable energy, where revenue is pegged to capacity and locked-in under long-term contracts.

With some CAD2 billion in new projects under development, AltaGas’ clear focus now is right where management said it would be after conversion: on taking advantage of low capital costs, renewable energy mandates and a lack of infrastructure serving shale gas areas to further build its base of fee-generating assets.

That’s very manageable given the company’s strong financial position. But it does mean that shareholder returns will flow from the growth of the business as much as from yield. That being said, 10 to 15 percent annual returns look like a lock. AltaGas Ltd is a solid buy for growth and income up to USD22.

Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) reported third-quarter earnings very much in line with those of prior periods. Overall revenue slipped 3.7 percent on the continued decline in the traditional local and long distance phone business, while distributable cash flow was off 6.8 percent on robust capital spending.

Distributable cash flow, however, once again covered dividend outlays by better than a 2-to-1 margin. Meanwhile, the rate of traditional business decline continues to slow, with cable telephony no longer expanding rapidly throughout the company’s rural Canada territory. Actual line losses to competitors again fell in both residential and business markets, allowing the company to largely offset them with a 4.6 percent drop in operating expenses. Operating margins rose to 51.9 percent of revenue from 51.4 percent a year ago.

Like its rural phone counterparts in the US, Bell Aliant’s future lies with building out its broadband network. The company’s fiber-to-the-home coverage is now available in cities throughout Atlantic Canada and is on track to pass 140,000 homes and businesses by the end of the year. Internet revenue overall–including DSL-based services–rose 6 percent year over year, while Internet television subscribers rose 5.1 percent. Residential high-speed revenue per customer surged 5.1 percent to a record.

By mid-2011 management expects growth of the new fiber network to scale up and light a fire under demand growth for its bundle of voice, Internet and television service. The company’s ultimate goal of 600,000 homes passed by the end of 2012 will be achieved with a minimum of new financial burden, giving it a major competitive advantage over cable rivals.

The company will reduce its monthly distribution from a current rate of 24.17 cents Canadian to a new rate of 47.5 cents a quarter. That will absorb an expected high 20s tax rate as well provide funds for growth, while still leaving a 7 percent plus yield. The result is a nice combination easily capable of producing 10 percent plus returns for years to come. Buy Bell Aliant Regional Communications Income Fund up to USD27.

Davis + Henderson Income Fund’s (TSX: DHF-UY, OTC: DHIFF) third-quarter revenue surged 16.3 percent, reflecting the continued growth of new services via a series of acquisitions over the past year.

Cash flow and net income were both hurt by a restructuring charge of CAD2.2 million, the result of integration initiatives that will produce annualized savings of CAD3 million to CAD4 million by the end of 2012.

Both, however, were still in positive territory and continued to comfortably cover the current dividend rate of 15.3 cents Canadian per month.

That dividend rate will drop to a quarterly rate of CAD0.30 a share when the company converts to a corporation on Jan. 1, 2011.

But it will continue to produce a healthy yield of 6 percent, even as management continues to lay the groundwork for future growth.

Davis + Henderson’s long-standing goal has been to grow revenue 3 to 5 percent a year, largely by taking its existing business digital. Consistent double-digit growth in recent quarters is clear proof it’s succeeding in transforming its operations as well as adding new ones via acquisitions. The core business is still checking account services, which account for 46 percent of revenue. But the company has also found growth in lending technology and services for mortgage origination.

The company’s hidden strength is its customer base, the healthy institutions that dominate Canada’s banking system. As Canada’s banks grow, so will Davis + Henderson’s opportunities, and that should lead to substantially more revenue and cash flow growth in coming years. That, in turn, should ensure management’s goal of “delivering stable and modestly growing cash distributions” going forward, which will push the company’s share price higher.

The result is another low-risk package offering 10 percent plus annual returns. Buy Davis + Henderson Income Fund up to my new target of USD20.

Keyera Facilities Income Fund’s (TSX: KEY-U, OTC: KEYUF) third-quarter bottom line was distributable cash flow of 75 cents per unit for a payout ratio of 60 percent. More important, however, were the successful growth initiatives it undertook, particularly the venture with Inter Pipeline Fund (TSX: IPL-U, OTC: IPPLF) to build a major diluent transportation, storage and rail services system for Husky Energy’s (TSX: HSE, OTC: HUSKF) Sunrise oil sands project.

The Husky deal positions Keyera as a player in oil sands growth for the first time and promises to be strongly accretive to cash flow when it starts up in 2014. Meanwhile, the company continues to benefit from strong activity around its natural gas plants, thanks to producers’ focus on areas rich in natural gas liquids (NGL).

Keyera has focused for several years on improving its NGL processing ability. And its Rimbley plant and Edmonton/Fort Saskatchewan energy hub assets are uniquely position to profit. Other facilities are also in prime position to cash in on demand for processing of solution gas extracted by producers developing Cardium light oil plays in west Alberta. And the company’s Simonette gas plant in the Deep Basin is benefitting from the introduction of horizontal drilling techniques to the region, ramping up NGL output.

Being in the right place in Canada’s energy industry at the right time is, of course, habit for Keyera. And it’s why the company will be able to convert to a corporation Jan. 1 without cutting its distribution or sacrificing its increasingly compelling opportunities for growth.

Speaking on the company’s third-quarter conference call this week, CEO Jim Bertram tied future distribution growth to the company’s ability to build distributable cash flow by building and buying assets. That’s the same formula Keyera followed to great success as a trust. With its position in the best areas of Canada’s energy patch, it’s set up for more of that as a corporation.

If there is a problem with Keyera now, it’s the share price, which has now run well past a buy target I’ve already raised several times.

The current yield is extremely solid, but until it starts to grow again, I’m inclined to leave my target for Keyera Facilities Income Fund at USD28. All those in the company should stick with it.

Macquarie Power & Infrastructure Income Fund’s (TSX: MPT-U, OTC: MCQPF) third-quarter distributable cash flow again lagged its dividend, resulting in a payout ratio of 156 percent.

That high number reflects the time needed to deploy cash from the sale of the trust’s interest in Leisureworld rather than any real dividend-threatening weakness.

Strong performance at the existing portfolio, for example, drove a solid 5.7 percent increase in Macquarie’s revenue for the quarter. Meanwhile, cash flow and funds from operations ticked up 5 and 2.9 percent, respectively, as management continued to enjoy success controlling costs.

Other bright spots included improved production at the Erie Shores Wind Farm and Whitecourt biomass facility, though it was offset somewhat by low water flows at the Wawatay hydro plant in Ontario.

Over the next five years, management expects the current monthly distribution of 5.5 cents Canadian to represent a payout ratio of 70 to 75 percent, based on its current portfolio. That includes the taxes that will be absorbed when Macquarie converts to a corporation on Jan. 1, 2011. The 5.5 cents monthly rate represents the level set a year ago by management when it initially announced its conversion plans, and so will hold after conversion.

Ultimately, Macquarie’s health will depend on deploying the Leisureworld sales proceeds into cash generating assets. The purchase of the 20 megawatt Amherstburg Solar Park project this past summer is one step in that direction.

The company will contribute CAD33 million of equity to the project upon the startup of commercial operations, anticipated to be June 2011. Builder SunPower will complete the project at fixed price and service the facility under a 20-year contract and is liable for performance as well.

Output, meanwhile, has been presold under a 20-year contract to the Ontario Power Authority at a guaranteed price of CAD420 per megawatt hour. The bottom line: a project with locked-in revenue and no real operating risk for Macquarie, with more to come.

Macquarie’s unit price has come a long way back from its late 2008 low of USD3.54. That’s in large part due to recognition by investors that the company’s 8 percent plus yield is increasingly secure. But there’s still room for 10 percent plus annual returns for buyers of Macquarie Power & Infrastructure Income Fund up to my target of USD8.

Pembina Pipeline Corp’s (TSX: PPL, OTC: PBNPF) third-quarter distributable cash flow was again strong enough to cover its distribution and ambitious plans for capital spending. Solid performance at fee-generating energy infrastructure businesses offset the negative impact of tighter margins at the energy marketing arm, the purpose of which is to leverage infrastructure operations.

Pembina completed its conversion to a corporation in early October without reducing its distribution. Sustaining and growing that payout going forward depends heavily on completing a series of major infrastructure on time and in line with budgets. Fortunately, in the words of CEO Bob Michaleski, “all our growth projects” are on track to do just that.

Right-of-way clearing for the Mitsue oil sands pipeline project is now complete, with grading and stringing now more than half complete. Meanwhile, preparations have been laid for the construction of the Nipisi Pipeline to begin in earnest after the winter freeze. That puts both projects firmly on track to meet Pembina’s scheduled startup date of mid-2011.

The projects together have a projected final cost of CAD440 million and will generate approximately CAD45 million a year in operating income. Income could increase substantially if current negotiations are successful for long-term capacity contracts that would support doubling the capacity of both pipelines. Pembina has also recently initiated construction of an enhanced natural gas liquids extraction facility at its Cutbank Complex. The company has already secured an anchor customer for the plant and is on track to contract out all capacity by the expected mid-2011 startup date.

All of these are low-risk projects that will generate steady cash flow for Pembina. Importantly, they also add scale and reach that will enable the company to initiate further low-risk assets, enhancing profitability and ultimately driving more dividend growth.

The stock has surged of late and may be due for a rest–at least that’s what a number of Bay Street analysts now project. That should not be a concern for the company’s long-term investors, however, who continue to enjoy a 7.5 percent yield paid monthly that should translate into annual returns of at least 10 to 15 percent to mid-decade on the company’s current plans alone. Pembina Pipeline Corp is a buy for those who don’t already own it up to USD22.

TransForce (TSX: TFI, OTC: TFIFF) continues to find ways to grow despite still-soft conditions in Canada’s fragmented transport and logistics industry. Overall revenue surged 11 percent, 10 percent excluding the automatic pass-through of fuel cost changes to customers.

That triggered a 20 percent boost in cash flow, further enhanced by a boost in margins from 13.7 to 14.9 percent. Finally, adjusted net earnings–the account from which dividends are paid–soared 71.4 percent, producing a very secure payout ratio of 41.7 percent. And the company slashed its debt to 55 percent of capitalization, down from 57 percent at the beginning of the year.

The company’s Package & Courier and Specialized Services segments were again standouts, with sales adding 21 and 39 percent to revenue over last year’s levels. That offset a flat performance at the company’s traditional Truckload and Less-Than-Truckload operations.

Looking ahead, the company remains well-positioned both to grow its business and to weather what continue to be tough industry conditions. In comments delivered with third-quarter earnings, CEO Alain Bedard stated the company would “seize opportunities for strategic acquisitions.”

That’s right in line with what TransForce has been able to do consistently well in the past, and it should have plenty of opportunity to do so going forward, given its own financial strength and the weakness of rivals. A major three-year contract to provide overnight courier services for the Ontario government will start contributing earnings next year and opens the door to still another business opportunity.

TransForce has handed investors a total return of more than 80 percent in US dollar terms this year but still trades well below its early 2006 high of over USD16. My expectation is it will take out that level and much more in the coming years. Buy TransForce up to my target of USD12 if you haven’t yet.

As noted above, I discuss the earnings of four energy-related Aggressive Holdings reporting in this month’s Feature Article, namely producers ARC Energy Trust (TSX: AET-U, OTC: AETUF) and Daylight Energy Ltd (TSX: DAY, OTC: DAYYF) and services companies Newalta Corp (TSX: NAL, OTC: NWLTF) and Phoenix Technology Income Fund (TSX: PHX-U, OTC: PHXHF). All four remain strong buys below buy targets shown in the Portfolio table.

That leaves Yellow Media (TSX: YLO, OTC: YLWPF), formerly Yellow Pages Income Fund, which completed its conversion to a corporation on Nov. 2.

The company will maintain its current monthly distribution rate of 6.67 cents Canadian per share for the remainder of the year, at which time it will reduce the payout to a new rate of 5.42 cents.

Despite the scheduled reduction, the new rate is clearly attractive, representing a percentage yield of well over 10 percent based on Yellow’s current share price.

The key question in my mind has been whether that rate will hold after conversion, or whether it will have to reduce yet again in the face of tough competitive and market conditions and the company’s need for capital.

The good news: While Yellow does still face challenges, particularly if the North American economy weakens, third-quarter numbers are nonetheless very supportive of its aims. First, distributable cash flow of CAD0.35 once again covered the distribution by a comfortable 1.75-to-1 margin. Moreover, it was flat with the prior quarter, indicating profitability has stabilized.

Also encouraging, overall revenue grew by 5 percent. That was fueled by 15 percent growth in organic (excluding acquisitions) online revenue for Directories and Vertical Media. Online revenue is now 27 percent of Yellow’s overall mix and is the clear future of the company. These numbers indicate its growth is now more than offsetting the steady erosion of the print directory business–and its impact will only grow in coming quarters. That’s a very good sign for Yellow’s future ability to sustain cash flows and distributions.

In the last couple months Yellow has launched several new offerings, including digital media advertising services, to leverage its dominant position in Canada’s web-based business directories. Another interesting initiative concerns the company’s RedFlagDeals.com site–Canada’s No. 1 online shopping community–a Deal of the Day targeted at consumers shopping for local goods and services. The company has also created a public application interface, enabling developers working on online and mobile platforms to develop applications streaming local search content from the company’s data base.

Finally, the company’s Vertical Media Business, which became a severe cash drain on the company the past couple years, saw its revenue and cash flow grow 29 and 27 percent, respectively, from year-earlier levels. That’s a sharp reversal from previous quarters and is the result of management’s cost cutting and shifting of resources to its Dealer.com service and away from still slumping real estate and generalist publications.

Not all of Yellow’s initiatives will prove successful. Meanwhile weakness in Canadian advertising and the steadily eroding print directory business–despite a near-national monopoly–are still a drag on growth. The company, however, still appears to be doing more than enough to beat the market’s very low bar for success, mainly maintaining its distribution.

That plus progress on the digital front continues to make Yellow Media, formerly Yellow Pages Income Fund, an attractive holding. It’s a buy for those who don’t already own it up to USD8.

Conversion Wrapup

Last month ARC Energy Trust (TSX: AET-U, OTC: AETUF) announced its conversion to a corporation will take place on or about Jan. 1, 2011. Management also affirmed its intention to continue paying a monthly distribution of CAD0.10 per share when the transition is completed, with future payouts dependent on business factors, particularly energy prices.

That leaves Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF), IBI Income Fund (TSX: IBG-U, OTC: IBIBF) and Parkland Income Fund (TSX: PKI-U, OTC: PKIUF) as Portfolio companies that still haven’t revealed exactly what their post-conversion distributions will be, making it impossible to say for certain what their yields will be in 2011.

Fuels marketer and distributor Parkland has been the most specific of the three as to its future plans, forecasting a rate of between 75 and 110 percent of the current monthly dividend of 10.5 cents Canadian. Management has promised to have more detail with third quarter earnings release, scheduled for Nov. 12.

In the meantime, even the lowest level in the range would still leave a yield of nearly 8 percent. That plus the company’s demonstrated growth potential are enough to make Parkland Income Fund a buy up to USD13 even before the official announcement.

Contract designer IBI has received court approval for its plan to convert to a corporation, slated for Jan. 1, 2011. Management hasn’t affirmed a specific dividend level when that happens. But it has made clear that the interests of officers and shareholders are closely aligned, as stock and hence dividends are a big part of compensation.

We’ll know more with the Nov. 11 third-quarter earnings release. Until then, IBI Income Fund is a buy up to USD15. Note the yield of 10.7 percent is pricing in considerable downside, minimizing risk.

As for Canfor, I warned with my initial recommendation last month that what was then a nearly 22 percent dividend would almost certainly be cut when the company converts to a corporation, also slated to take place on or about Jan. 1, 2011. The main reason is simply management’s extremely aggressive dividend policy, under which the pulp and paper company is paying out at a rate equal to 92 percent of what was very robust third-quarter cash flow.

As I pointed in the Oct. 26 Flash Alert, Canfor posted very healthy results. Key No. 1 was continued strength in the global market for softwood pulp, thanks to still-robust demand in developing Asia and a mild recovery in North America. Global softwood pulp inventory was just 27 days at the end of September, an increase from the prior quarter but still at what CEO Joe Nemeth calls “the low end of the range to what is considered balanced.”

Key No. 2 was the company’s ability to control costs at its mills, which are among the most efficient in North America. That was despite a scheduled maintenance outage, which pushed up per-unit costs by shutting in some potential output.

Meanwhile, a major effort to eliminate whole log chip deliveries in favor of cheaper raw materials continues to advance, and is expected to be completed by the end of 2010. The company has also been able to slash current and future energy costs by taking advantage of government help in a CAD1 billion “Green Transformation Program.”

These initiatives will keep Canfor at the top of its industry going forward. That will offset somewhat the higher taxes the company will face as a corporation. What is wholly beyond management’s control, however, is the health of the market for its products.

The company has been able to do very well marketing its low-cost fare to a tight market, while high-cost rivals were forced to shut in capacity.

Now that some of those producers are gearing back up, the question is whether the market will be able to absorb the new supply at current prices. And that uncertainty promises to keep Canfor’s cash flow–and its dividend level–volatile as well.

Management has pledged to continue paying out as aggressively as a corporation as it has as a trust. But starting in 2011 that 90 percent or so will be from a smaller pool, as Canfor starts paying taxes. The upshot: Even if pulp prices remain solid in coming months, we can look forward to a distribution cut of the order of 25 to 30 percent come January.

Of course, even a 50 percent dividend cut is well priced into any company yielding upward of 20 percent. And Canfor was paying well above that last month, after hiking its distribution for the sixth time in a year, by 13.6 percent to a monthly rate of CAD0.25 per share. In fact, such a dramatic cut is arguably still priced in even after the Canfor’s gains of nearly 20 percent over the past month.

That low bar of expectations–coupled with management’s demonstrated skill navigating tough environments and the company’s low costs–were the basis for my recommendation last month. And they’re the basis for my decision to bump the buy target on Canfor Pulp Income Fund up to USD16 as well.

Unfortunately, there is one additional thing to be aware of with Canfor. That is that some US investors could wind up receiving cash for their Canfor trust units when conversion takes place rather than shares of the new corporation.

Every trust conversion we’ve seen so far has entailed a seamless transition for investors on both sides of the border. Trust units have been expeditiously exchanged for ordinary shares, showing up almost immediately in accounts under the new post-conversion symbol.

In some cases, the US over-the-counter (OTC) listing has been suspended for a short time and even changed, as was the case with Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF) in early October. Even then, however, it was back and running within hours. And in the cases of widely traded fare like the former Yellow Pages Income Fund–now Yellow Media–trading under the OTC symbol was never interrupted.

Only one company tracked in How They Rate has created a taxable event by converting, Advantage Oil & Gas (TSX: AAV, NYSE: AAV). And that was actually favorable for investors, as it created bookable tax losses while allowing investors to keep their bets on. For the rest, there’s been no tax consequence on either side of the border.

That will also be the case for Canadian investors in Canfor Pulp and it should also prove so for US investors. However, based on some of the feedback I’ve received from readers, the company’s 128-page “Information Circular” concerning the plan–submitted Apr. 27, 2010–is creating far more than the usual element of confusion.

For starters, it’s much longer than the typical conversion-related circular we’ve seen most trusts file. Then there’s the assertion that, reading from p. 15, “[U]nder applicable US securities laws, Newco cannot distribute Newco shares to US unitholders who are not Qualified Purchasers.”

The term “Qualified Investors” is of course familiar to anyone who’s ever taken a Series 65 or worked in the brokerage business. It basically refers to anyone with an account of a certain size who is deemed to be duly sophisticated enough to make certain purchases.

It’s entirely unclear, however, whether a “Qualified Purchaser” (as defined under this Circular) is the same as a “Qualified Investor” (as defined by current US securities laws). In fact, just what is a “Qualified Purchaser” is never defined in the document.

What is stated, however, is if a US investor isn’t one, he or she will be cashed out at the market price for Canfor upon its corporate conversion. That’s not likely to be a bad thing in my view, as conversions have almost universally produced higher share prices, and Canfor has certainly been moving in the right direction. But it is certain to produce a great deal of confusion.

So is the fact that this document goes on to elaborate a whole series of tax considerations aimed squarely at US investors only. These include a provision under “Certain United States Federal Income Tax Considerations,” which specifically states “a US Holder generally should not recognize any income, gain or loss upon the disposition of Fund Units in exchange for Newco Shares pursuant to the arrangement.”

On p. 36 of the document there’s a rather lengthy segment describing a process by which “Newco” will determine just which of their US unitholders are indeed “Qualified.” Mainly, the company will send a form of Qualified US Unitholder Certification “which is to be completed, executed and submitted to Newco and the Fund by each US Unitholder prior to the Effective Date.”

Several pages of text immediately follow this discussion that describes taxes and other consequences for US unitholders. This mirrors language used in other trusts’ conversion-related Information Circulars. Presumably, this only applies to “Qualified” unitholders, whoever they might be.

If you’re interested in this document, you can find it in several places, including Canada’s SEDAR information service. Interestingly, it’s not prominently displayed on Canfor’s website, though you might be able to receive it via e-mail by contacting the listed Investor Services representative.

Here’s my advice. For Canadians, Canfor Pulp Income Fund remains a strong buy up to USD16, or roughly CAD16.50. For US investors, the units are also a buy up to USD16, based on the merits of the underlying business.

The worst thing that will happen to anyone is these forms go out and they’re deemed to be “not qualified.” At that point, they’ll simply be cashed out at whatever market price prevails on or about Jan. 3, which is the first trading day of 2011.

More likely, everyone’s trust units will be exchanged for shares in the corporation, just as they have been for every other trust conversion so far. And if you do meet the definition of a “Qualified Investor” under current US securities laws–you know who you are–you should have no problem meeting whatever requirement there are, assuming, of course, that these forms are actually ever sent out.

On the other hand, I’m certainly not a fan of this kind of complication. If you’re in the least uncomfortable with what may happen here–be it filling out a form or being cashed out involuntarily–take the profit and wait for the conversion to take place to buy back in. You’ll still qualify for the Nov. 15 distribution of CAD0.25 per unit, which goes to unitholders of record as of Oct. 29.

Already Set

Last month I published three lists of Portfolio companies. The first includes the 12 recommendations that have already converted and the half dozen that don’t have to. This group is paying the same dividends it will in 2011. The only exception is Yellow Media (TSX: YLO, OTC: YLWPF), which plans a reduction to 5.4 cents Canadian per month. That’s a yield of roughly 10.3 percent based on its current price.

Whatever post-conversion adjustments had to be made have already been made. Distributions from here on in will depend solely on the prospects for the underlying businesses. And the betting here is the next step will be increases. Dividends should no longer be withheld 15 percent if they’re held in IRAs. Here they are:

• Ag Growth International (TSX: AFN, AGGZF)
• AltaGas Ltd (TSX: ALA, OTC: ATGFF)
• Artis REIT (TSX: AX-U, OTC: ARESF)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)
• Blue Ribbon Income Fund (TSX: RBN-U, OTC: BLUBF)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)
• Colabor Group (TSX: GCL, OTC: COLFF)
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)
• EnerVest Diversified Income Trust (TSX: EIT-U, OTC: ENDTF)
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)
• Newalta Corp (TSX: NAL, OTC: NWLTF)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)
• Perpetual Energy (TSX: PMT, OTC: PMGYF)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)
• TransForce (TSX: TFI, OTC: TFIFF)
• Vermilion Energy (TSX: VET, OTC: VEMTF)
• Yellow Media (TSX: YLO, OTC: YLWPF).

Nine Portfolio members has not yet converted but have affirmed that they’ll be maintaining distributions at current levels when they do. Note that Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF) has delayed its planned conversion to a corporation, while Chemtrade Logistics Income Fund (TSX: CHE, OTC: CGIFF) now plans not to convert at all, as costs outweigh and supposed benefits.

Again, what you see in the Portfolio table is what you’ll be getting after conversions. And my bet is we’ll be seeing increases in the not too distant future for each, including for those whose profitability is affected by changes in commodity prices. They are:

• ARC Energy Trust (TSX: AET-U, OTC: AETUF)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)
• 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)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)
• Pheonix Technology Income Fund (TSX: PHX-U, OTC: PHXHF).

The third group comprises seven trusts that have declared their intention to convert to corporations, have set a date for that to take place, and have established a post-conversion distribution below the current rate. As I’ve said above, the prospective dividend cuts are now well known and baked into their share price.

There is, consequently, no real downside risk when they actually do make the cuts. The market has now adjusted share values to their prospective yield levels. Even if there is some selling on the part of those not paying attention–a group that hopefully won’t include any Canadian Edge readers, since I’ve written exhaustively about all of these companies–it will be quickly compensated for by buyers who spot value.

Such a selloff would be a buying opportunity should it occur. And it might be a reason to adopt a strategy of setting buy limits at a “dream” buy-in price. But no one should expect value to last long, and speed will be of the essence for anyone trying to take advantage.

Here’s the list, along with what the yield would be were these companies paying at their declared post-conversion rates now. Note that Penn West Energy Trust has already cut its distribution to its promised post-conversion level, three months in advance of its actual conversion. What you see now in the table is indeed what you’ll be getting then:

• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–CAD0.475 per quarter, 7.1%
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–CAD0.0629 per month, 6.3%
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–CAD.30 per quarter, 6.2%
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–CAD0.09 per month, 4.5%
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–CAD.06 per month, 4.3%
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–CAD.045 per month, 6.9%

I continue to expect all Portfolio companies to return to the practice of distribution growth that they held to before Halloween 2006. Rather than a fixed rate like a bond, post-conversion yields are merely a baseline for future growth.

That particularly applies to my Conservative Holdings, whose earnings don’t directly depend on commodity prices, neither, in most cases, the level of economic growth. For the past four years most of them have tried to outgrow their prospective 2011 taxes. Current dividends generally represent what they’re comfortable with paying under very conservative assumptions. As a result, once they return to dividend growth they can be counted on to do so regularly, which will push share prices up as well.

Aggressive Holdings’ dividend-boosting prospects, in contrast, are considerably more explosive, though again they’re going to depend heavily on what happens to the price of energy and other commodities.

As the November Feature Article points out, I favor producers with rising production profiles. Cash flows are still affected by price swings. But they tend to outperform in both good markets and bad. Post-conversion dividend levels are easily sustainable after taxes, and even at lower energy prices. That leaves a lot of upside as production ramps up, particularly if energy prices get stronger. And as at least oil-weighted converted trusts have demonstrated, management will boost distributions if energy prices justify it.

In short, conversions or no, the same rules apply to investing in all Canadian Edge holdings. The key to wealth-building and sustaining/growing distributions is still the health of the underlying businesses. The companies that run the best will generate the biggest returns. And finding them is still my primary goal.

What to Watch

Third-quarter numbers will continue to roll in over the next several weeks. Here’s when can expect to see the rest. Note I’ll be updating the numbers periodically in Flash Alerts for CE Portfolio companies, with a full recap in the December issue.

Here are reporting dates for the rest of the Canadian Edge Portfolio Conservative Holdings:

• Artis REIT (TSX: AX-U, OTC: ARESF)–Nov. 9
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Nov. 10
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–Nov. 9
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–Nov. 9
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Nov. 8
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)–Nov. 11
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–Nov. 11
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–Nov. 10
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)–Nov. 12
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–Nov. 9
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Nov. 10

Here are reporting dates for the rest of the Canadian Edge Portfolio Aggressive Holdings:

• Ag Growth International (TSX: AFN, OTC: AGGZF)–Nov. 10
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Nov. 10
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–Nov. 12
• Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)–Nov. 12
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–Nov. 5
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–Nov. 8
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–Nov. 11
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–Nov. 10
• Vermilion Energy (TSX: VET, OTC: VEMTF)–Nov. 5

With Canadian banks flush and most companies facing few refinancing needs, odds of another 2008-style credit crunch are now extremely remote. I continue to monitor debt levels closely for future vulnerability as well as ability to make acquisitions.

The figures shown below for Portfolio companies’ debt maturities and expiring credit agreements in 2010 and 2011 reflect a mix of second and third quarter data. Figures shown are debt due before the end of 2011 as a percentage of market capitalization, along with the percentage that has fallen or risen over the past month.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–0.0%, same (debt due, change)
• Artis REIT (TSX: AX-U, OTC: ARESF)–0.2%, same
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–0%, same
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–0%, same
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–0%, same
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–0%, same
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–0%, same
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)–0%, same
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–0%, same
• Colabor Group (TSX: GCL, OTC: COLFF)–10.0%, same
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–0%, same
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–0%, same
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)–0%, same
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–1.2%, same
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–0.0%, same
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–10.0%, same
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–0%, same
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–0.9%, same
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–3.4%, same
• TransForce (TSX: TFI, OTC: TFIFF)–0%, same

Aggressive Holdings

• Ag Growth International (TSX: AFN, OTC: AGGZF)–0%, same
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–0%, same
• Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF)–0%, same
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–20.3%, same
• Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CWIUF)–0%, same
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)–0%, same
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–0%, same
• Newalta Corp (TSX: NAL, OTC: NWLTF)–0%, same
• Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)–37.2%, same
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–2.3%, same
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–0%, same
• Peyto Energy Trust (TSX: PEY, OTC: PEYUF)–0%, same
• Phoenix Technology Income Fund (TSX: PHX-U, OTC: PHXHF)–0%, same
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–7.1%, same
• Vermilion Energy Trust (TSX: VET, OTC: VEMTF)–0%, same
• Yellow Media (TSX: YLO, OTC: YLWPF)–0.0%, -100%

Clearly, none of these companies have significant refinancing risk. And the majority of what is outstanding isn’t due until late in 2011. It in fact represents an opportunity for management to cut interest costs by refinancing at a lower rate.

Here’s the list of 16 CE Portfolio companies that have never once cut dividends. Of this list, IBI Income Fund (TSX: IBG, OTC: IBIBF) and Parkland Income Fund (TSX: PKI-U, OTC: PKIUF) have yet to declare definitive post-conversion dividend policies. The rest have put 2011 risk behind them and are safe enough for even the most conservative investor. See the Portfolio table for current yields and prices.

• Ag Growth International (TSX: AFN, OTC: AGGZF)
• Artis REIT (TSX: AX-U, OTC: ARESF)
• Atlantic Power Corp (TSX: ATP, OTC: ATLIF)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)
• Brookfield Renewable Power Fund (TSX: BRC
• Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF)
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)
• Colabor Group (TSX: GCL, OTC: COLFF)
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)
• Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)