Editor’s Note: In Brief is the executive summary of the March 2011 issue of Canadian Edge. Please use it as a guide to points of interest.

Canada’s economy grew at a 3.3 percent annualized rate in the fourth quarter of 2010. That’s almost twice as fast as it did in the third quarter and well above expectations. The country also recorded its strongest gains in exports in six years and the most robust consumer spending since 2007.

That’s good news for the generally low-tax, light regulation-minded government of Prime Minister Stephen Harper, which is already on the verge of winning its long-coveted majority in Canada’s House of Commons. It’s positive for the Canadian dollar, which continues to benefit from the global bull market in natural resources. And it’s good news for Canadian companies in general in 2011, which by and large continue to report solid fourth-quarter and full-year 2010 numbers.

Best performing of all have been the former income trusts now converted to corporations. Of the 76 tracked in How They Rate, only four have lost money since they officially converted.

Several of them have scored huge gains, including Ag Growth International (TSX: AFN, OTC: AGGZF), which is up 147 percent, and TransForce Inc (TSX: TFI, OTC: TFIFF), which is up 117 percent. That’s on top of returns many of these companies realized between the time they announced conversions–and set post-conversion dividend policies–and when they actually jumped. In fact, including those returns, all 76 are ahead.

At this point the 2011 windfall has pretty much played itself out. The companies that survived the stress tests of the past five years have emerged stronger than ever, more than making up for the losses of 2008 as well as the so-called Halloween Massacre, when Finance Minister Jim Flaherty announced the 2011 tax on trusts. The only investors who were really massacred in Canada were those who bailed out en masse, either at the November 2006 low point or later in early 2009.

There are still, however, plenty of robust returns to be made in Canada after the trust conversion windfall. The key is in individual stock selection, focusing on still-undervalued laggards or leaders that offer outsized dividend growth.

The companies I recommend as buys this month hail from both groups. The former category offers some combination of huge yields and/or upside potential, as they convince a skeptical investment public of their prospects. There’s risk should they falter as businesses, but also immense potential reward.

There’s nothing like a rising dividend to highlight a strong business, the universal hallmark of the later group. Rather, the risk is missed expectations, which have risen considerably in past months as indicated by higher share prices.

Things have to go very bad very fast for there to be any risk at all to the dividend. But as we’ve seen before, even modestly bad news can trigger a sharply negative market reaction, particularly if too many investors have placed stop-losses in the same place.

That’s still a strategy I strongly advise investors to avoid when buying these stocks. There are just too many potential catalysts for volatility right now. And all stops ensure is that you’ll be sold out if their price point is breached, and probably well below that level.

Rather, our best course lies in keeping careful tabs on the health of the underlying businesses of the companies we own. As long as they’re strong, we hold on, even if the market reacts negatively initially to some piece of news. If they weaken, we’re out, particularly if the market reacts positively and gives us a better exit point.

Fourth-quarter and full-year 2010 earnings reporting season won’t conclude for all Canadian Edge How They Rate companies until the very last day of the first quarter. In fact, only 21 Portfolio companies–including new Aggressive Holding Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–have reported as of press time.

Nonetheless, the numbers combined with management guidance and answers given during conference calls are still the best possible clue to how these companies are doing. Not everything we’ve seen thus far is outright positive. Nor does it justify the high prices some of these companies trade for.

By and large, however, our companies are performing as strong businesses should. That’s the best possible sign more gains lie ahead in 2011, in addition to growing yields that continue to rank among the world’s highest and safest.

Portfolio Action

This month, I’m adding an Aggressive Holding: Acadian Timber Corp (TSX: ADN, OTC: ACAZF). The company offers both a high yield of more than 8 percent and the likelihood of strong dividend growth going forward. It’s also a play on an undervalued commodity.

Other than that, the only Portfolio action this month is a handful of buy target raises, where companies’ fourth-quarter earnings and dividend numbers justified the move. These include AltaGas Ltd (TSX: ALA, OTC: ATGFF), ARC Resources Ltd (TSX: ARX, OTC: AETUF), Atlantic Power Corp (TSX: ATP, NYSE: AT), Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF), Keyera Corp (TSX: KEY, OTC: KEYUF) and Vermilion Energy Inc (TSX: VET, OTC: VEMTF).

Portfolio Update also highlights earnings results for the 21 Portfolio recommendations that have reported fourth-quarter and full-year 2010 results. The rest will be tracked in upcoming Flash Alerts.

High Yield of the Month

High Yield of the Month features the two best buys for March. This month I have something new as well as an old favorite. The primary attraction for both is dividend growth.

A new addition to my Aggressive Holdings, Acadian Timber Corp (TSX: ADN, OTC: ACAZF) last month boosted its quarterly dividend to 20.62 cents Canadian per share from a prior rate of CAD0.05. The timber company, which is controlled by Brookfield Asset Management (TSX: BAM/A, NYSE: BAM), has weathered horrific conditions in its industry and is now poised for robust growth of cash flows and distributions, in addition to paying a yield of more than 8 percent.

Conservative Holding Keyera Corp (TSX: KEY, OTC: KEYUF) is still a solid choice for new buyers despite a nearly 300 percent total return over the past two years. The reason: a growing portfolio of fee-based assets that are generating ever-larger cash flows with little risk. The company lifted its dividend 6.7 percent in last month, just weeks after converting to a corporation and starting to pay entity-level taxes.

Both companies are converted corporations and pay dividends that are “qualified” for tax purposes in the US, i.e. they’re taxed at a maximum rate of 15 percent. They’re exempt from Canadian 15 percent withholding tax if held in IRAs. Buy Acadian Timber Corp up to USD11, Keyera Corp to USD38.

How They Rate

All How They Rate entries should now reflect any changes to their post-conversion Toronto Stock Exchange (TSX) and US over-the-counter (OTC) trading symbols. For a complete listing of what changed in the recent trust conversion wave, see the Jan. 12 Flash Alert. Note that in most cases, OTC symbols did not change. Neither did New York Stock Exchange (NYSE) listings for trusts trading there that converted.

Note that dividend yields for seven companies in How They Rate have still not been updated to reflect post-taxation rates. These are annotated in my comments in the table and are reviewed once again in Dividend Watch List.

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 featured in the Income Trust Tax Guide.

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, described in the text below the How They Rate table, 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 debt-to-assets ratio meets “Very Safe” criteria for the sector.
• One point if the company’s debt maturing before Jan. 1, 2013, is less than 20 percent of its market capitalization.
• 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 has not cut its distribution over the preceding five years.

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

• Oil and Gas–All producer trusts are included here.
• Electric Power–Power generators.
• Gas/Propane–Distributors from propane to package ice.
• Business Trusts–A range of businesses involved principally with consumers.
• Real Estate Trusts–All qualified Canadian REITs and real-estate related corporations.
• 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–Canadian banks, investment houses, and other trusts and corporations providing support to these businesses.
• 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–These trusts and corporations ship freight and move passengers by bus, truck, rail or air.

Coverage Changes

We’re adding four new How They Rate companies this month: Armtec Infrastructure Inc (TSX: ARF, OTC: AIIFF), Athabasca Oil Sands Corp (TSX: ATH, OTC: ATHOF), MEG Energy Corp (TSX: MEG, OTC: MEGEF) and Premium Brands Holdings Corp (TSX: PBH, OTC: PRBZF). All are reviewed in this month’s Canadian Currents. There are no deletions from coverage this month.

Advice Changes

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

A&W Restaurant Royalties Income Fund (TSX: AW-U, OTC: AWRRF)–To Buy @ 22 from Hold. The stock has retreated roughly 10 percent from last month’s level, despite raising its distribution 10.4 percent effective with the Feb. 28 payment and posting strong fourth-quarter same-store sales.

Baytex Energy Corp (TSX: BTE, NYSE: BTE)–To Buy @ 55 from Hold. The stock has been a big winner but still has upside from expanding output and rising oil prices. It’s also just launched a dividend reinvestment plan that welcomes US investors.

Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF)–To SELL from Hold. The stock has blasted off to a new all-time high. The yield–based on the stated post-conversion annualized rate of CAD1.40 a share–is down to barely 8 percent. Meanwhile, downward pressure on pulp prices hurt fourth-quarter cash flows despite higher revenue. The yield posted in How They Rate still reflects the pre-conversion dividend rate.

Cenovus Energy Inc (TSX: CVE, NYSE: CVE)–To Hold from Buy @ 30. Despite a 15 percent hit to fourth quarter cash flow on costs, the Encana Corp (NYSE: ECA) oil spinoff has exploded to an all-time high. The catalysts–rising oil prices and the company’s long-term promise in the oil sands–are legit, but there are better buys now.

CurrencyShares Canadian Dollar Trust (NYSE: FXC)–To Hold from Buy @ 95. The loonie has run far and fast, but the Canadian government is now working hard to keep its gains in check, so it’s likely due for at least a pause in its upward momentum. Canadian stocks are far better currency bets.

Enbridge Income Fund Holdings Inc (TSX: ENF, OTC: EBGUF)–To Buy @ 19 from Hold. Cash available for distribution surged 11.2 percent in the quarter, as the company brought new assets on line and ran existing ones well.

Keyera Corp (TSX: KEY, OTC: KEYUF)–To Buy @ 38 from Hold. The converted corporation, a High Yield of the Month, continues to prove it’s worth the recent gains in its share price.

Progress Energy Resources Corp (TSX: PRQ, OTC: PRQNF)–To Buy @ 13 from Hold. The company reported solid cash flows and reserve growth despite lagging natural gas prices. The dividend is low but safe thanks to conservative financial policies.

Royal Bank of Canada (TSX: RY, NYSE: RY)–To Hold from Buy @ 55. The stock has risen and the yield is low, despite the fact that the company still faces real uncertainty at its US operations.

Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–To Buy @ 50 from Hold. Fourth-quarter results and continued progress building new oil and gas production in Australia, Canada (in the Cardium trend light oil) and Europe earn the company a higher buy price, though those who already own it no doubt have enough.

Ratings Changes

Here CE Safety Rating changes, reflecting fourth-quarter and full-year 2010 numbers. Expect more next month as the remaining How They Rate companies report.

Aeroplan Group (TSX: AER, OTC: GAPFF)–To 3 from 4. Fourth-quarter cash flows fell enough to push the payout ratio up to 95 percent, a risk in the transport industry. The good news is revenues were up and the costs that crimped margins should prove temporary.

Boston Pizza Royalties Income Fund (TSX: BPF-U, OTC: BPZZF)–To 1 from 0. The company announced a 27 percent distribution reduction, effective with the Feb. 28 payment. That takes the payout ratio down to 73 percent based on fourth-quarter numbers, enough to earn a Safety Rating System point.

Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–To 6 from 5. The payout ratio is back to a low level after a return to more normal hydro power conditions, and the company reports solid progress with new construction as well.

Fortis Inc (TSX: FTS, OTC: FRTSF)–To 4 from 3. Strong fourth-quarter numbers across the board brought down the payout ratio to 70 percent.

Progress Energy Resources Corp (TSX: PRQ, OTC: PRQNF)–To 3 from 1. Strong results brought down the payout ratio to a very low level in the fourth quarter.

Superior Plus Corp (TSX: SPB, OTC: SUUIF)–To 3 from 2. The company cut 2011 guidance after posting disappointing fourth-quarter earnings due to underperforming construction and propane operations. The dividend cut of 25.9 percent, however, takes the payout ratio down to a manageable level, though the stock is still only for aggressive investors.

TransAlta Corp (TSX: TA, NYSE: TAC)–To 5 from 4. The power plant fleet ran well in the fourth quarter, offsetting weak power prices and bringing down the payout ratio.

Yellow Media Inc (TSX: YLO, OTC: YLWPF)–To 3 from 4. Fourth-quarter numbers were encouraging in many areas, particularly Internet advertising, and management has maintained its 2011 full-year guidance. But the payout ratio relative to cash earnings did rise to 88 percent. The dividend should hold at the current level but a higher number means more risk.

Feature Article

It’s the best of times and the worst of times for Canada’s energy patch. All things liquid remain red hot, from light oil to natural gas liquids and bitumen mined from oil sands. Meanwhile, natural gas is back under USD4 per million British thermal units, as North America wrestles with an historic supply glut and still-slack demand.

Companies heavy into liquids are seeing not only rising cash flows to pay dividends and finance capital spending, but also upward revisions in their value of their reserves. In contrast, natural gas-focused producers are seeing diminished cash flows and downward revisions in the value of their reserves, which limit access to capital.

Ever innovative, the Canadian energy industry is responding. Many companies are shifting to the more profitable areas of the industry and reducing exposure to the least. Others have found ways to make money in a weak environment by boosting output from low-cost sources like shale. I highlight the best buys in the industry now, from producers to infrastructure.

Canadian Currents

Here’s the background on four companies new to How They Rate coverage this month.

Tips on Trusts

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

Dividend Watch List— Last month Superior Plus Corp (TSX: SPB, OTC: SUUIF) announced it will reduce its monthly dividend from a rate of 13.5 cents Canadian to CAD0.10. That matches management’s lowered projection of CAD1.40 in annual earnings for 2011. The stock initially plunged CAD2 over a two day period but has since recovered about halfway. Hold.

In this section I again recap companies listing yields that are still showing up in How They Rate at pre-cut rates. These include Big Rock Brewery Inc (TSX: BR, OTC: BRBMF), Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF), Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF), Futuremed Healthcare Products Corp (TSX: FMD, OTC: FMDHF), North West Company Inc (TSX: NWF, OTC: NWTUF), Royal Host Inc (TSX: RYL, OTC: ROYHF) and Ten Peaks Coffee Company Inc (TSX: TPK, OTC: SWSFF).

Correct yields will show up on our live quote feed once these companies declare their first dividends paid from 2010 earnings. Until then, please continue to consult Dividend Watch List.

The current Watch List is as follows. Note that the List is likely to change as more fourth-quarter and full-year 2010 earnings are released.

• Brompton Stable Income Fund (TSX: VIP-U, OTC: BVPIF)–Hold
• Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF)–SELL
• Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF)–Hold
• FP Newspapers Inc (TSX: FPI, OTC: FPNUF)–Hold
• InterRent REIT (TSX: IIP-U, OTC: IIPZF)–SELL
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–Hold
• Royal Host REIT (TSX: RYL-U, OTC: ROYHF)–Hold

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

Another Look At Tax Season–Last month Canadian Edge Associate Editor David Dittman presented ammunition to use to ensure your Canadian holdings are properly taxed. This month, he revisits the issue with the latest updated material.

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.