Where does opportunity lie in Canada as we enter 2011? My bets are on a welcome push from the US economy, continued decoupling of dividend-paying stocks from what were once benchmark interest rates, a run to USD100 a barrel and beyond for oil, more robust spending on renewable energy and the ascendancy of a new class of high-yielding equities.

To be sure, equity prices are higher than at this time last year. That means dividend yields are correspondingly lower. It also means investors’ expectations are higher and therefore more difficult to beat, and dangerous to miss.

Canadian Edge Portfolio stocks returned 40.3 percent on average in calendar 2010, adding to a 65.5 percent gain in 2009. Those numbers will be especially hard to match again, particularly as more and more picks reach all-time highs.

Fortunately, the risk of real disappointment is also much less than a couple of years ago. For one thing, the macro environment is decidedly less threatening than when the market bottomed in early 2009. Virtually every company that can has refinanced its debt at the lowest interest rates since the 1950s, making a reprise of the 2008 credit crunch nearly impossible.

Meanwhile, the North American economy is steadily gaining strength, putting capacity and people back in action. And, despite rising commodity prices, inflation isn’t much of a threat yet, as still-abundant spare capacity and high unemployment make the kind of wage-push inflation seen in the 1970s impossible.

There’s still a lot of handwringing regarding the US dollar. But here, too, Canada is in good shape, with its banks solid and federal budget closest to balance among major countries. The country’s trade balance is increasingly positive, as the US is now joining developing Asia demanding more of its natural resources.

The Canadian dollar climbed a wall of worry in 2010 but managed to exit at virtual parity with the US dollar, with a gain of more than 5 percent. And it’s difficult to impossible to conceive of any US dollar collapse that wouldn’t benefit Canada’s currency, and therefore the US dollar price of its stocks and US dollar value of its dividends. In fact, dividend-paying Canadian stocks are likely to prove the perfect hedge for US investors if there is a US dollar collapse, all the while generating world-beating yields.

Add to that early January’s final wave of income trust conversions to corporations–which eliminated a four-year old cloud of worry–and Canada’s skies look a lot clearer than they have for quite a while.

We may not repeat the explosive returns we’ve seen the past two years. But there’s still plenty of potential to snare big-time capital gains as well as solid, high yields, if you look in the right places.

Below I examine each of my five forecasts highlighted above and identify likely winners. Note most if not all of these companies are already in the Canadian Edge Portfolio. For more on my strategy–as well as changes to the CE Safety Rating System–see Portfolio Update.

An Anchor No Longer

Last year’s biggest winners in Canada included trusts that beat expectations on post-conversion dividends and companies involved in the production, processing and distribution of natural resources, excepting leveraged producers of natural gas. Among the few losers were companies with extensive exposure to the US.

Canadian companies operating in the US were hampered by the sluggish state of the economy, which depressed sales and operating margins. And, unless they were very careful, the rising loonie further crimped earnings by hitting the home currency value of US dollar receipts.

The rising loonie is, of course, a long-term trend that began nearly 10 years ago with the Canadian dollar worth barely 60 US cents. Its inexorable rise since has mirrored that of oil and other commodities. And as long as resource demand remains high around the world, the loonie is likely to stay strong.

Dealing with a rising Canadian dollar is, therefore, a cost of doing business in the US for Canadian companies. The other side of the coin, however, is that with the loonie at parity to the buck, Canadian companies have unprecedented buying power in the US. And that’s been augmented by an equally low cost of capital for both equity and debt.

For the past couple years, Canadian companies, from banks and real estate investment trusts to power producers and medical companies, have bought up US assets at a pace never seen before. The payoff has been slow in coming. In fact, acquisitions have been a noticeable drag on earnings thus far for many companies.

However, that may be about to change, and quite possibly with a vengeance. Exhibit A is the graph “US Comeback,” which focuses on two pieces of data: the annual rate of growth in US gross domestic product (GDP) in recent quarters and the US Conference Board’s Leading Economic Index (LEI), which is designed to forecast that growth.

As the graph shows, the LEI rose 1.1 percent in November 2010, a robust pace and acceleration from solid readings in the two preceding months. Behind the number, factories continued to crank up output, particularly in Southeast.

The service sector registered its best growth in more than four years, consumer spending is increasingly robust, if selective, and even employment is looking up, with the four-week average of initial unemployment insurance claims recently hitting a two-year low.

There are still weak spots, notably the housing and homebuilding market, whose spectacular bust triggered the 2008 meltdown.

State and local governments are strapped for cash, as demand for services has soared and tax receipts fallen. Personal bankruptcies are at elevated levels, and much of the banking system is still financially weak.

The LEI and corresponding indicators, however, clearly indicate the worst is now well behind and growth is steadily building in the US. The upshot: Canadian companies’ newly acquired US operations are about to go from anchors to robust engines of growth.

Among the winners are our two CE Portfolio members from the health care sector: CML Healthcare Inc (TSX: CLC, OTC: CMHIF) and High Yield of the Month and new addition Extendicare REIT (TSX: EXE-U, OTC: EXTEF). Both derive their cash flow from operating fee-generating medical facilities in the US and Canada. CML’s are testing centers, while Extendicare focuses on treatment.

Of the two, Extendicare is the most US-weighted, at two-thirds of revenue versus CML’s one-third. Ultimately, however, CML may have the most to gain from a building US economic recovery, as traffic to its diversified medical imaging services facilities has noticeably dropped during the downturn. More jobs means more insured Americans, and a rebound in volume.

Potential changes to the recently passed US health care law are a wildcard, as is the implementation of the act itself. But with its corporate conversion behind it, a reasonable payout ratio, opportunities for expansion in the US and Canada, a strong balance sheet and a history of adapting seamlessly to regulatory changes, the company’s in good shape to handle whatever happens, even as it waits for a better economy to improve business conditions. CML Healthcare Inc is still a buy up to USD12.

For more on Extendicare REIT and its 9 percent-plus yield, see High Yield of the Month. It’s a buy up to USD10.

When the economic crisis hit, several of Canada’s biggest banks began making big investments south of the border. That push has continued into 2011, with Bank of Montreal (TSX: BMO, NYSE: BMO) recently buying a Milwaukee-based institution for USD4.1 billion to form the 15th-largest bank in the US. Toronto-Dominion Bank (TSX: TD, NYSE: TD), meanwhile, has agreed to purchase Chrysler Financial for USD6.3 billion, adding to a banking presence south of the border that now includes some 1,300 branches.

Thus far these investments have done little for their acquirers’ bottom lines. In fact, the drag from continued loan losses and poor volumes in the US was a big reason Canada’s big banks had mostly disappointing earnings in the recently reported fiscal 2010 fourth quarter.

The good news is the sector remains well capitalized, thanks to conservative financial management and strong operations in Canada. The bad news is this is reflected in share prices that have repeatedly hit all-time highs of late, even as investors wait on dividend growth to resume.

The bottom line: Canadian real estate investment trusts are a better bet on a recovering US property market and financial sector. As this month’s Canadian Currents article points out, the sector is also benefitting from a favorable clarification of rules by the Conservative Party government concerning their tax status. Meanwhile, cash flows are stronger than ever as investments made during the recession are paying off.

The sector’s most prolific investor in the US is RioCan REIT (TSX: REI-U, OTC: RIOCF). The REIT’s venture with Cedar Shopping Centers (NYSE: CDR) continues to bear fruit, closing nearly USD300 million of acquisitions thus far. RioCan owns 80 percent of the venture. The REIT also has a budding relationship with Kimco Realty Corp (NYSE: KIM) and is pursuing nearly 200 separate deals on both sides of the border.

The newly acquired properties in the US feature the same strengths as the REIT’s Canadian portfolio, namely high occupancy (98 percent as of late 2010) and quality anchored by ultra-reliable tenants like Wal-Mart Stores (NYSE: WMT). That plus the very low-cost debt and equity financing RioCan has obtained the past couple years ensures the 10 percent of assets now represented by US properties will pay off richly as the US economy gets back on track. And CEO Edward Sonshine has held out the possibility of extending that as high as 20 percent if conditions for acquisitions remain this favorable.

Best of all, investors can buy into this growth with very little risk, as the REIT earns a perfect 6 under the Canadian Edge Safety Rating System. Buy RioCan REIT up to USD23.

Finally, the US recovery is certain to benefit transportation companies, the most dynamic of which is Conservative Holding TransForce Inc (TSX: TFI, OTC: TFIFF). The provider of diversified transportation services continues to be a powerful consolidator of North America’s still fragmented industry, announcing the purchase of logistics and delivery firm Dynamex for CAD248 million last month. TransForce, the No. 15 transporter in North America, outbid private capital firm Greenbriar Equity Group to add No. 61 to its asset base.

Unlike Canada-focused TransForce, Dynamex derives fully 62 percent of revenue from US operations. That opens doors for the company south of the border, as well as for considerable cost savings in Canada. And it eliminates pricing pressure from a key competitor to boot.

As has been the case with prior deals, TransForce will finance this one with existing credit facilities, which it’s had little problem refinancing at good rates of late. The 20 percent jump in third-quarter 2010 cash flows is a clear sign the Canadian business has turned up. Now investors can look forward to contributions from a recovering US as well. Buy TransForce whenever it trades below USD12.

Still Decoupled

One of the biggest surprises for many investors in the fourth quarter of 2010 was how dividend-paying equities managed strong returns while so-called benchmark interest rates rose sharply. At the same time the 10-Year US Treasury yield spiked from 2.5 to 3.5 percent, for example, the S&P/Toronto Stock Exchange Income Trust Index (SPRTCM) returned more than 10 percent.

That decoupling, however, shouldn’t have shocked anyone who has followed this market the past three years. The fortunes of dividend-paying equities–including those based in Canada–have been following the ups and downs of economic growth rather than interest rates since the economy started turning down in early 2008.

In late 2008, when interest rates fell to generation lows, dividend-paying stocks, including Canadian trusts, suffered their most severe meltdown since the Great Depression nearly 80 years earlier.

Then, in 2009 and 2010, as the economy began to recover and interest rates rose, high-yielding Canadian stocks recorded their most explosive gains in history.

The market’s behavior during the fourth quarter of 2010 marks a continuation of the trend. Dividend-paying Canadian equities rally when the news on the economy seems to improve and slide when it falters. And that’s set to remain the case in 2011 as North America inches its way back to health.

The real question is how fast the economy will improve. The good news is Canada’s economy is in no danger of a relapse, at least if the health of its residential real estate market is any guide. In fact, all signs point to further growth.

Projections for growth by province remain robust. Of the biggest, Quebec is expected to grow another 2.6 percent in 2011 on top of the 2.7 percent in 2010.  Ontario looks to grow at a slightly faster 3.1 percent pace on top of 3.3 percent last year, though that could accelerate if US markets on which it depends strengthen.

Alberta, meanwhile, looks set to hit 4.1 percent this year, after growing by 3.4 percent last year, signaling a strong recovery in the energy sector in recent months. Manitoba will grow 3.5 percent, Saskatchewan 5.3 percent, British Columbia 2.9 percent and Atlantic Canada from a low of 2 percent in Nova Scotia to 5 percent in Newfoundland and Labrador.

That’s a bullish picture indeed, and it should be money in the bank for newly converted corporations Bird Construction Inc (TSX: BDT, OTC: BIRDF) and IBI Group Inc (TSX: IBG, OTC: IBIBF). Bird Construction is a builder of major infrastructure projects, almost entirely in Canada. IBI, meanwhile, is a designer of such projects, based in Canada but with most of its business in the US and elsewhere.

Both companies were forced to radically shift their business from the private to the public sector the past few years, as demand from the former for new projects all but dried up. Both are still getting the majority of new backlog from large public projects, from which revenues are secure but margins are usually lower than in the private sector.

Both companies are still very profitable despite this. Bird, for example, managed to convert to a corporation without cutting its payout, while IBI managed a modest decrease. Both companies, however, will be a lot more profitable as the private sector revives, with IBI poised to receive a double dose thanks to its operations in the US.

Bird Construction is a buy on dips to USD35, a price it held for some weeks in late autumn. IBI Group is a buy up to USD15.

Faster growth in Canada would also be a big plus for movie theater owner and operator Cineplex Inc (TSX: CGX, OTC: CPXGF) and food distributor Colabor Group (TSX: GCL, OTC: COLFF). The latter lost a major customer in early 2010 due to the economy, which depressed last year’s revenue. Both are healthy companies well-positioned to weather any further weakness in their respective sectors. Buy Cineplex up to USD22, Colabor Group on dips to USD12.

Return to Triple Digits

If there was a terminally weak sector in 2010, it was leveraged natural gas companies. And with winter heating season nearly half done, it’s hard to be sanguine on natural gas’ prospects for this year, either.

Despite higher demand for generating electricity, transport and as a substitute for oil, the clean fuel has remained mired under USD5 per million British thermal units since early 2010. In fact, the only gas companies likely to make money are those that can cut costs by ramping up output or that have reserves rich in natural gas liquids (NGLs), increasingly a valuable substitute for oil.

In contrast, oil prices look set to get even stronger in 2011, smashing through USD100 a barrel and beyond. The key is black gold is a global market, increasingly driven by demand from developing Asia. Gas, in contrast, is a local market in North America, with virtually no capacity for export as liquefied natural gas (LNG). In fact, all current LNG capacity was essentially developed for imports, based on the much higher gas prices that prevailed in the middle of the last decade.

Oil’s ability to transcend the North American economy’s weakness in recent years has kept producers flush and poised for growth.

That should benefit all of the energy producers in the Aggressive Holdings, as well as service companies like Newalta Corp (TSX: NAL, OTC: NWLTF) and PHX Energy Services Corp (TSX: PHX, OTC: PHXHF).

It’s also good news for companies that build and own energy infrastructure that transports and refines raw oil and liquids to marketable products.

And coupled with continued global pressure on Canada to control carbon dioxide emissions, it’s a boon for investment in renewable energy as well.

The challenge in these sectors for investors is finding companies that have yet to take off. Even some natural gas-weighted producers like newly converted Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) scored huge gains in 2010 on top of similar surges in 2009, just by beating the market’s abysmal expectations. Provident Energy Ltd (TSX: PVE, NYSE: PVX), too, has managed big gains, despite the fact that its NGLs business last year suffered weaker margins.

One of the still inexpensive exceptions is High Yield of the Month Macquarie Power & Infrastructure Corp (TSX: MPT, OTC: MCQPF), a high-yielding bet with a growing portfolio of global renewable energy assets. Macquarie Power & Infrastructure is a buy up to USD9.

In the energy producer arena, Daylight Energy Ltd (TSX: DAY, OTC: DAYYF) is the best-priced of my Portfolio picks, in part because of its still-large natural gas production weighting. But as I pointed out in the November 2010 Feature Article, Energy: Focus on Output, Daylight is rapidly growing its output, particularly of tight oil and NGLs.

That’s enabled it to post robust cash flows in the later half of 2010 and set the stage for even more explosive results in 2011. Trading at just 1.63 times book value, the company has been covering its payout with distributable cash flow by a better than 2-to-1 margin since it became a corporation in spring 2010.

Right now that extra cash is going to fund epic growth, boosting share value. Ultimately, some will find its way to distribution growth as well, particularly as energy prices rise and the company shifts to liquids. Daylight Energy Ltd is a buy up to USD11.

Finally, Parkland Fuel Corp (TSX: PKI, OTC: PKIUF) features both a high post-conversion dividend of around 9 percent and considerable growth potential from rising demand for energy, as well as the consolidation of the Canadian fuel distribution industry. On Dec. 31 the company announced the acquisition of Island Petroleum Products Ltd, the leading independent heating fuel supplier on Prince Edward Island.

The deal adds 55 employees, 25 delivery trucks, 25 service vehicles, 13 card lock locations and four office locations, as well as an expanded presence in a new market. The deal should be accretive going forward, though the majority of income will be made from heating oil sales in the winter months.

Parkland has had its ups and downs since I added it to the Aggressive Holdings last year. Volatile market conditions have prevented it from realizing the full value of recent acquisitions, crimping third-quarter 2010 earnings. Management announced it would cut its dividend to 82 percent of the trust’s CAD0.105 per month rate at conversion, the lower end of the 75 to 110 percent range it had previously set. And last month, Suncor Energy (TSX: SU, NYSE: SU) issued a notice that it would terminate its current supply contract with Parkland on Dec. 31, 2013.

Uncertainty generated by all three events explains why Parkland units have lagged and why it still has such a high yield. This time next year, however, I fully expect it to trade at a much higher level, as profits build and misconceptions about its strength are washed away.

The Suncor contract termination, for example, was long expected by management. Moreover, it’s part of a transition by the company to rely more on retail and commercial fuel sales and less on refiners’ margins for earnings. And with three years to replace supplies, management has plenty of flexibility to get things as they want them.

The new dividend is well covered by recent profits, which almost certainly represent a nadir for the now converted corporation. In the meantime, investors can still buy Parkland Fuel Corp up to my longstanding target of USD13.

Trusts: Not Dead Yet

Perhaps the biggest surprise for investors as we move into 2011 is the large number of Canadian trusts that continue to just say no to conversions. The table “Not Converting” lists 39 companies in How They Rate that aren’t converting to corporations now. In fact, the vast majority of them never will.

A third of them are real estate investment trusts, which alone of trusts maintained their tax-exempt status under the 2007 Tax Fairness Act. Another half dozen are “stapled shares” including the two remaining income participating securities (IPS) I cover.

An IPS combines interest-bearing debt with dividend-paying equity into a single high-yielding security. The structure enables companies to basically avoid paying corporate taxes as they would have formerly under income trust organization.

Technically, however, they are corporations and therefore exempt from SIFT (specialized investment flow-through) taxes.

At one time there was speculation the Canadian government would crack down on this structure, eliminating the tax advantage. But with so few of them, it’s hardly worthwhile for the government to move against what’s a perfectly legal structure. And most companies that traded as an IPS have abandoned the structure entirely, finding its complexity a turnoff.

That leaves the remaining 20 companies on the list: income trusts that for one reason or another that have yet to convert to corporations.

The Canadian government’s rules have imposed SIFT taxes on these companies as of Jan. 1. But they also allow for very favorable conversion terms if the move is made before 2013.

As a result, we’re likely to see at least some of these companies take the plunge in the next two years. That likely includes Conservative Holding Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF), which in late October 2010 announced it was postponing its planned conversion indefinitely.

The fund stated it had based its decision on the forecast it would not owe taxes in 2011 if it remained a SIFT and would clarify its future plans in the early part of the year.

Brookfield Renewable still intends to pay monthly dividends through the first quarter of 2011, switching to a quarterly payout at the same annualized rate beginning in the second quarter.

Meanwhile, it continues to invest aggressively in new wind and hydro power assets. Buy Brookfield Renewable Power Fund up to USD20.

Other companies, however, have stated unequivocally that they have no intention to convert to corporations, ever. Their ranks include Aggressive Holding Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF), which enjoys the benefit of not owing any SIFT taxes thanks to having the bulk of its operations outside of Canada.

They also include the likes of Extendicare, which has paid SIFT taxes since 2007. New How They Rate addition Boyd Group Income Fund (TSX: BYD-U, OTC: BFGIF) announced in December 2010 that it would remain a SIFT and simultaneously boosted its payout 16.7 percent. And there are others outside the How They Rate universe with similar intentions that we continue to study.

To be sure, many of these trusts offer little or no yield advantage over converted corporations. Chemtrade, for example, yields a little over 8 percent at its current price, versus 9 percent for already converted fellow Aggressive Holding Parkland Fuel. Converted power company Macquarie P&I, meanwhile, yields 8 percent versus unconverted Brookfield Renewable.

As I’ve said before, we’re agnostic when it comes to corporate structure. Who cares if a company is an income trust or a corporation, so long as it pays a generous dividend? In fact, the elimination of the 15 percent withholding tax for converted trusts held in IRAs has made conversion downright attractive.

But the fact that so many companies have chosen to maintain trust structure–despite 2011 taxation–confirms one basic tenet: Canada is still the friendliest country in the world for dividend-seekers. And with an aging population, an investor-friendly government, sound economy and well-managed companies, opportunities abound, even after two years of one of the most impressive market rallies in history.