December’s High Yield of the Month picks both pay fat dividends. Aside from that, however, they have little in common. Canadian Edge readers will want to make certain what they buy matches their risk tolerance, as well as zeal for higher returns.

On the higher risk/higher potential return side of the equation is a new addition to the CE Portfolio’s Mutual Fund Alternatives: Precious Metals & Mining Trust (TSX: MMP-U, OTC: PMMTF). On the side of reliable dividends and steadier returns is Conservative Holding Just Energy Income Fund (TSX: JE-U, OTC: JUSTF).

Tacking the newcomer first, Precious Metals & Mining holds a portfolio of primarily equities issued by metals and minerals mining and exploration companies.

Run by Sentry Select Capital Corp, it’s a closed-end fund, meaning it trades a fixed number of shares on the Toronto Stock Exchange and over the counter (OTC) in the US.

Distributions are paid monthly, on or about the fifteenth. The current rate of CAD0.10 per share has been paid since March 2008, when it was raised from a rate of 9.6964 cents.

That was the fifth distribution boost since the fund’s inception in summer 2006, when it started out paying 4.0434 cents Canadian a month.

Not surprisingly, the rise of the fund’ payout has roughly matched the upward progression in commodity prices over that time. The fund’s market price has been a somewhat more volatile story. The 2006 initial public offering price of around CAD8 per unit surged to a range of CAD11 to CAD12 from mid-2007 to mid-2008, at which time it began to crash along with the general market. The low of CAD3.17 was hit on Nov. 21, 2008, roughly the same time a bottom was put in for many resource prices, notably gold.

Viewed since its inception, Precious Metals & Mining’s share price performance has closely matched that of the price of gold bullion, with the fund throwing off a total return of roughly 130 percent versus bullion’s 121 percent. That’s a relationship that can be masked by looking at shorter periods of market history. For example, the trust lost far more than bullion during the crash of 2008, while it’s far outgained it during the recovery since.

That’s basically the relationship gold stocks have to the price of gold, and it provides a clear window on what investors in this fund can expect going forward. In fact, while the fund was able to hold its dividend level in 2008 due to the discretion of management, no one should count on that happening again were gold to significantly retreat from current levels.

Rather, Precious Metals & Mining should be considered a high-quality but nonetheless heavily leveraged bet on the prices of metals and minerals, particularly gold. As of the most current information provided by Sentry (for the end of third quarter, Sept. 30), the fund’s portfolio is comprised of 23 securities, actively managed. Roughly half the portfolio is in just three names, none of which are covered in Canadian Edge: Semafo Inc (TSX: SMF, OTC: SEMFF), Allied Nevada Gold Corp (TSX: ANV, AMEX: ANV) and Golden Star Resources (TSX: GSC, AMEX: GSS). Another 17 percent or so is in Gold Wheaton Gold Corp (TSX: GLW, OTC: GLWGF) and Osisko Mining Corp (TSX: OSK, OTC: OSKFF), with the remaining one-third divided among 18 companies of varying sizes.

Some 60 percent of the portfolio was considered to be in junior gold and silver mines, with another 24 percent in intermediate-sized miners. The rest was a mix of precious metals exploration companies, senior mines and other metals, as well as a 9 percent stake in cash. Expenses are in line with similar funds at 1.83 percent of assets.

The fund’s stated objectives are long-term capital appreciation from the mining sector, monthly cash distributions and to provide a hedge against inflation. As long as commodity prices and gold in particular remain in an uptrend, it will achieve all of those goals for investors with room to spare.

What could go wrong? The biggest danger is a sharp reversal of the commodity bull market and a rapid collapse in gold prices. That’s precisely what we saw in the early 1980s, as the Federal Reserve under Paul Volcker ratcheted interest rates skyward to choke off inflation.

Gold’s rise this time around, however, is occurring in the context of little or no present US inflation. Also, adjusting for inflation, revisiting the 1980 high would take a rise in gold prices to USD3,000 an ounce, well more than a double from here. And, while gold mining stocks have been strong, we’ve yet to see anything remotely approaching a mania even on a par with 1987, let alone the early ’80s.

More to the point, Precious Metals & Mining is a leveraged bet on gold prices and to a lesser extent the price of other metals and minerals going higher. That’s precisely the reason the reason to buy it. If you can’t stand the possibility of the price or dividend halving in the face of lower prices, you should be in something else.

Barring a crash in gold, the biggest thing that could go wrong would be a rise in the Canadian dollar that’s not accompanied by a surge in gold prices. That’s because dividends are paid in Canadian dollars, while gold and other minerals are priced in US dollars.

A surge in the Canadian dollar would increase the value of dividends paid to US investors. But if gold prices didn’t keep pace, it would be harder for Sentry to keep paying out.

Fortunately, such a scenario is extremely unlikely for a couple of reasons. For one thing, the Canadian dollar is usually led by the trend in commodity prices, rather than the other way around.

For another, Canadian monetary authorities are constantly on watch to prevent an upward spike in the loonie against the US dollar, since it would be a severe blow to certain sectors of their economy, while gold prices aren’t officially controlled. In fact, gold’s gains have solidly outpaced the Canadian dollar’s rise.

Unlike most high-yield funds, only a very small percentage of the distribution is drawn from what’s considered “investment income.” That’s a function of the fact that the mining business itself is capital intensive and not very conducive to paying out big dividends. That means the dividend level is dependent on the long-term appreciation of the fund’s assets, which, in turn, makes the dividend leveraged to metals’ prices as well.

Again, Precious Metals & Mining Trust could be a huge winner. And it’s a solid way to garner a high level of cash flow while metals and mining stock prices rise. But if these trends fail to pan out, it could also be a big loser. Keep that in mind if you decide to buy Precious Metals & Mining Trust, up to my target price of USD12.

Note that closed-end funds always trade at a market price that’s more (premium) or less (discount) than the value of their assets. Precious Metals’ current price is roughly a 4.7 percent premium to net asset value (NAV), almost exactly at the midpoint of a 12-month high premium of 17.7 percent (Feb. 4) and low discount of 12.7 percent (June 17).

Even leaving aside the ups and downs in metals prices–and the leveraged moves in mining stocks–that alone adds up to a lot of volatility. That’s why conservative investors will be far better off with my other High Yield of the Month, Just Energy Income Fund (TSX: JE-U, OTC: JUSTF).

A seller of natural gas and electricity in unregulated North American retail markets, Just Energy also pays an attractive yield of roughly 8.6 percent. The payout is monthly, and management will maintain the current level after converting to a corporation on Jan. 1.

More important, that cash flow stream is secured by a business that’s proven its ability to grow even in the toughest environments.

The company’s fiscal second quarter (ended Sept. 30) saw some of the fastest growth in its history, with a 156 percent increase in net customer additions through marketing. That brought the company’s total client list up to 3,161,000 for the first time, a 36 percent jump from last year’s levels.

Overall sales rose 33 percent, while gross margin surged 7 percent (5 percent per unit) indicating profits remained firm. One reason was cost control efforts that held general and administrative costs flat, despite the continued absorption of newly acquired Universal Energy and Hudson Energy Services as well as organic growth. Distributable cash after all marketing expenses rose 8 percent per unit, driving the payout ratio down to a modest 79 percent.

Remarkably, those results occurred in what’s historically a seasonally weak quarter for the company. That’s because demand for electricity and natural gas is far stronger in the colder months in Canada and the areas of the northern US where Just Energy does most of its business. That augurs well for the rest of the fiscal year, when the weather will be far more conducive to energy use as the mercury drops.

Just Energy’s business is essentially going to areas that have deregulated electricity and gas sales–mainly all of Canada and a dozen or so US states–and signing on customers to multiyear contracts for service, often at fixed prices. Management then proceeds to hedge out all the variables, particularly anything related to commodity prices but also such risks as bad debt. The result is a secure stream of cash flow with which to fund the distribution as well as further business expansion.

Some 40 percent of customers are “commercial” entities, which are subject to less weather volatility than residential users of energy. The purchase of Hudson Energy Services this year has dramatically extended the company’s reach into the US, which now accounts for a little more than half of overall margin. And that percentage is likely to grow going forward.

Breaking down the business, Just Energy now provides natural gas to British Columbia, Ontario, Quebec, Manitoba and Alberta, as well as Michigan, New York, Illinois, Ohio and California. And it sells electricity to Ontario, Alberta, New York, Texas, Illinois, Pennsylvania, New Jersey, Maryland, Michigan, California and Massachusetts. Much of the latter is via an immensely popular “green power” offering, for which customers tend to be much less likely to switch to competitors.

The balance sheet is very strong. Only CAD35 million in bond principal is due though 2011 (1.8 percent of market capitalization), and only another CAD90 million is due in 2014 before the first significant maturity of CAD330 million in 2017.

Outside of acquisitions, the company’s only significant capital expenditures are marketing costs for gaining new customers, which are wholly covered with internally generated cash flow.

Just Energy’s last distribution boost was back in mid-2008, when it raised the payout to the current rate of 10.0333 cents Canadian. Since then, it’s paid two special distributions, most recently 20 cents per unit in January 2010.

That was management’s strategy to comply with government rules regarding trust distributions, while keeping the base rate low enough to maintain after converting to a corporation.

The merits of that far-sighted and conservative strategy have been made clear by Just Energy’s ability to maintain its distribution after converting in January, dealing an effective dividend increase to US IRA investors as well as Canadians who hold it in taxable accounts. As the company gets used to paying taxes and operating as a corporation, however, I fully expect to see a return to the dividend increases of the past, which management used to deal out several times a year. In the meantime, Just Energy Income Fund is a solid buy for high income and some growth up to my current buy target of USD15.

Neither High Yield of the Month’s investors have anything to worry about concerning 2011. Just Energy formally declared its intention to convert to a corporation on Feb. 4, 2010, proposing a reorganization plan that was approved by unitholders in July. Management at the time pledged to maintain its trust dividend rate of 10.33 cents Canadian per month after becoming a corporation and has confirmed that several times since. Conversion will be a non-taxable event on both sides of the border.

Closed-end mutual funds holding income trusts are exposed to 2011 to the extent their holdings are forced to cut dividends. Precious Metals & Mining, however, isn’t focused on income trusts, mainly because there have never been any mining companies organized as trusts. The fund itself is not a taxable entity.

The only noticeable change will be in Just Energy’s trading symbol(s). At a minimum, Just Energy will drop the “-U” suffix from its Toronto listing. It could also see at least a temporary suspension of trading in its current five-letter OTC symbol “JUSTF,” and possibly even a change in that symbol, as other converting trusts have. Any disruption of this sort, however, will be short-lived, just as it has been for every other converting trust. And there will be no impact on dividends, ownership, earnings or anything else important.

For more information on Just Energy and Precious Metals & Mining, see How They Rate. Just Energy is listed under Gas/Propane, while Precious Metals can be found as a new listing under Trust Mutual Funds. Click on the trusts’ names to go directly to their websites. Click on the Toronto Stock Exchange (TSX) symbol to go to their Google Finance pages for a wealth of information ranging from news releases to price charts. Click on their US symbols to see all previous writeups in Canadian Edge and its weekly companion Maple Leaf Memo.

These are substantial companies that trade frequently in both the US and Canada. Precious Metals & Mining is smaller at a market cap of about CAD200 million, and its units trade over the counter in the US. Just Energy has a market cap of CAD1.91 billion and also lists OTC in the US.

I’ve recommended Just Energy in the past, and readers have reported ease in trading. Precious Metals & Mining is a new recommendation and a closed-end fund. It appears to do decent OTC volume but may be easier to buy on the Toronto Stock Exchange. Some states have “blue sky” laws that may not allow your broker to pitch either or both of these to you. But the laws won’t prevent you from placing the order. 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 Exchange or OTC in the US.

Distributions paid by both companies are considered 100 percent qualified for US tax purposes. Both provide tax information to use as backup for US filing–whether or not there are errors on your 1099–on their websites. For direct links see 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 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.

If held in an IRA, distributions paid by Just Energy will be exempt from Canadian withholding after the company’s conversion to a corporation in January. The first exempt payment will be what’s declared in January for late-month payment.

At that point, the effective post-conversion dividends will rise 17.6 percent for US IRA investors. Precious Metals & Mining may continue to be withheld 15 percent, as it does not and will not pay corporate tax.

For more information on IRAs and withholding, see the November Canadian Currents as well as this month’s Tips on Trusts.