Editor’s Note: In Brief is the executive summary of the April 2011 issue of Canadian Edge. Please use it as a guide to points of interest. Note I’ve changed the order of items slightly to make In Brief an easier read. Let me know what you think. — RC

Reviving dividend growth, solid earnings, low capital costs and strengthening balance sheets on the one hand, with robust commodity prices, the rising Canadian dollar and vibrant Canadian economy on the other: That’s a compelling bullish combination for our favorite high-yield Canadian stocks in spring 2011.

Unfortunately, expectations are also higher, demonstrated by the loftiest prices–and lowest yields–that we’ve seen in quite some time. In fact, two of every three CE Portfolio recommendations now trade above my buy targets, as shown in the Portfolio listings.

Targets are based on three things: revenue security, likely dividend growth and current yield. In the near term stock prices react to myriad factors, from research house opinions to wholly unrelated current events. Ultimately, however, yield-paying stocks’ total returns track dividend growth.

My targets are far from perfect. But by adding yields to likely dividend growth rates we get a pretty good approximation of what annual total returns to expect for anyone who buys at the current price. For example, we can expect a company yielding 8 percent and growing 5 percent a year to produce annual total returns of 13 percent.

I then compare this number to risk, as measured by the Canadian Edge Safety Rating System. I have six criteria. The more a company meets, the higher its rating–and the safer its payout and more reliable its dividend growth will be.

Some low-rated companies are rated “buy,” while some high-rated companies are rated “hold” or “sell.” But generally, I’m willing to pay more–i.e. accept a lower sum of yield plus dividend growth–for a higher-rated company.

Conversely, I’ll demand a higher yield/dividend growth combination if there are more questions about a company’s strength, shown in a lower CE rating.

So many stocks trading above buy targets means first off that quality buys are tougher to come by now, and that investors must be patient making new purchases.

More ominously, it can also be a sign that stock prices in general have run too far and too fast, and the market as a whole is due for a correction of some magnitude.

The past couple of years, we’ve seen several pullbacks of varying intensity. All of them ended with the Canadian market heading higher. Each provided some solid buying opportunities for high-quality stocks but was best viewed as an event to simply ride out.

The historic crash of 2008-09 was of another order. It also ended well for those who held onto their positions in high-quality investments. Those who sold at least some positions before the crisis–which was arguably the greatest economic/credit/market debacle in 80 years–and bought back later managed to score truly historic returns.

I’m a long-term wealth-builder by nature, so I’m constantly wrestling with the question of when to sell. Back in summer 2008, for example, the gains we’d seen in the first half of the year were indeed making me nervous.

My June 2008 Portfolio Update article was titled The Case Against Oil and Gas. I argued “energy’s rise over the past several years (had) spawned a sizeable group of investors who believe they can’t lose buying oil and gas producer stocks.” I advocated to “not be averse to taking some profit off the table after a steep run-up, like the one we’ve just had.”

Anyone who followed that strategy didn’t buy energy stocks at what proved to be a market top. And had they held only the high-quality stocks I advised, they’ve had the opportunity to be made whole in the recovery since March 2009.

What I missed doing and have regretted since was following my instinct to really lighten up on positions when the markets became overstretched. That begs the question: Is now such a time where taking meaningful money off the table makes sense? What are the odds of a repeat of 2008 and how far should we go to protect against them now?

The higher our stocks go, the more important the answers to these questions will become.

This month’s Feature Article starts the discussion with a strategy to follow now, while Portfolio Update highlights strengths and weaknesses of our holdings.

As for new buying, it’s true that bargains are scarcer now. But as my High Yield of the Month pair demonstrates, they’re still out there. And with markets this fearful and volatile, there’s also a real opportunity to score big from “mini-crashes” in individual stocks, by setting buy limit orders at “dream prices” well below current levels.

The bottom line is we’re going to continue building wealth the same way we always have in Canadian Edge. That’s by focusing on buying and holding the highest-quality stocks we can. Our picks’ power was affirmed once again by fourth-quarter and full-year 2010 numbers. And I’m confident they’ll shine again when first-quarter 2011 results begin to come in later this month.

Higher stock prices mean higher expectations–and more room for disappointment and selloffs that inevitably follow. If we’re patient and disciplined, however, we can turn that to our advantage. And that’s my immediate goal as we move into the second quarter of 2011.

Portfolio Action

I’m not making any additions to or subtractions from the Canadian Edge Portfolio this month. As of right now, 18 of the 22 Conservative Holdings are trading above my buy targets, as well as seven of the 16 Aggressive Holdings. If you don’t yet own them, don’t chase them.

Instead, focus your buying entirely on the four Conservative and nine Aggressive Holdings that still trade below target, while setting buy limit orders on any others you want to own. Patient investors should enter “dream buy prices” for any stocks they want to own, or own more of.

Portfolio Update explains how to utilize this strategy and identifies suggested prices for setting buy limit orders on each of my recommendations. I also recap recent developments for all holdings and what to expect in the coming year.

High Yield of the Month

High Yield of the Month features the two best buys for April. This month I’ve selected one that will realize its projected total return from a combination of strong growth and modest yield, and another featuring high yield and modest growth.

The first is global agricultural equipment maker Ag Growth International (TSX: AFN, OTC: AGGZF), which now yields well over 5 percent and has consistently grown sales at annual percentage rates in the upper teens. The company’s grain-handling equipment is in very high demand in the booming North American agricultural business and increasingly overseas. We’ve already enjoyed a mighty gain in the stock and expect a lot more in coming years.

The second is a rare Conservative Holding still trading below buy target, Colabor Group (TSX: GCL, OTC: COLFF), a leading consolidator in Canada’s still widely dispersed wholesale food and non-food product industry. The stock pays a monthly yield at an annualized rate of 8.6 percent. Growth has been stalled the past year by the loss of a major customer to the recession. But fourth-quarter results show a return to growth, as the company continues to successfully execute new acquisitions, primarily in eastern Canada.

Ag Growth International is a buy up USD50, Colabor Group up to USD13.

Feature Article

Canadian Edge’s focus has always been long-term wealth-building, especially by collecting high yields. That’s still the case here in spring 2011. But with the market continuing to soar, it’s fair to ask how much more we can expect before there’s a serious pullback, even for the highest quality companies.

I explore possible catalysts for a correction, including potential shock treatment for the US federal budget deficit. And I highlight how I intend to ensure Canadian Edge Portfolios are high and dry come what may.

Canadian Currents

The Canadian oil sands is an increasingly important part of the global energy equation. Much progress has been made making extraction of the resource cleaner and more efficient. With the price of crude oil looking locked on a long-term trend higher, there’s little question that the sands will be exploited to the extent that infrastructure can support it.

Here’s a look at companies using innovative processes such as steam-assisted gravity drainage (SAGD) to bring down costs, reduce the long-term impact of oil sands production and provide a key part of the bridge to the clean-energy future.

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—Canfor Pulp Products (TSX: CFX, OTC: CFPUF) and Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) have yet to declare a dividend as a corporation. As a result, both are still showing yields in quote services–including the one we use in How They Rate–that don’t reflect dividend cuts announced when they converted from income trusts. I look at what both are likely to pay.

In contrast, Big Rock Brewery (TSX: BR, OTC: BRBMF), Futuremed Healthcare Products (TSX: FMD, OTC: FMDHF), North West Company (TSX: NWF, OTC: NWTUF) and Ten Peaks Coffee Company (TSX: TPK, OTC: SWSFF) declared their first dividends as corporations in March. As a result, current yields shown in How They Rate are now accurate.

Royal Host (TSXL RYL, OTC: ROYHF) has elected to “suspend” its dividend entirely as it adjusts to life as a corporation. Imvescor Restaurant Group (TSX: IRG, OTC: IRGIF), which didn’t have to convert, has also eliminated its dividend as part of an extensive restructuring process. I look at prospects for both companies.

The current Watch List is as follows. Note that the List is likely to change as first-quarter 2011 earnings are released later this month. Note also that companies on the Watch List can actually be buys, if potential returns are high enough.

• Brompton Stable Income Fund (TSX: VIP-U, OTC: BVPIF)–Hold
• Canfor Pulp Products (TSX: CFX, OTC: unknown)–SELL
• Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF)–Hold
• FP Newspapers (TSX: FPI, OTC: FPNUF)–Hold
• Interrent REIT (TSX: IIP-U, OTC: IIPZF)–SELL
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–Buy @ 5

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

IRA Withholding Update–The situation is improving. We have updates on brokerages that are doing the right thing by their customers.

How They Rate

Coverage Changes

There are no coverage changes this month.

Advice Changes

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

Boardwalk REIT (TSX: BEI-U, OTC: BOWFF)–To SELL from Hold. This owner of apartments in western Canada appears to be in solid shape financially but is also valued like the priciest US real estate investment trusts with a yield of less than 4 percent.

Cameco Corp (TSX: CCO, NYSE: CCJ)–To Buy @ 30 from Hold. There’s nothing like a full-fledged nuclear plant disaster to trigger an exodus from nuclear power stocks. But this leading uranium producer won’t have any problem making sales as more plants are built and older ones become more valuable than ever.

Clearwater Seafoods Income Fund (TSX: CLR-U, OTC: CWFOF)–To Hold from SELL. Fourth-quarter results were a solid improvement over prior periods, with cash flow up 48 percent. The company also affirmed it won’t convert to a corporation until 2012, though restoration of a dividend is uncertain.

Freehold Royalties Ltd (TSX: FRU, OTC: FRHLF)–To Hold from Buy @ 18. Shares have now appreciated more than 20 percent above my prior buy target. Fourth quarter results were solid but not spectacular.

Perpetual Energy (TSX: PMT, OTC: PMGYF)–To Buy @ 5 from Hold. I’ve been waiting for good news from this gas producer for some time and fourth quarter results seem to provide it. Risks are high at 93 percent reliance on gas production but the price is low and upside robust.

Ratings Changes

Here are ratings changes, reflecting fourth-quarter and full-year 2010 numbers.

Algonquin Power & Utilities (TSX: AQN, OTC: AQUNF)–To 5 from 4. Fourth-quarter 2010 earnings came in strong, with a 35.7 percent profit boost on a series of successful acquisitions. The payout ratio came down to 34 percent, even as management raised the dividend 8.3 percent.

Armtec Infrastructure (TSX: ARF, OTC: AIIFF)–To 3 from 4. The company turned in fourth-quarter numbers that were in line with Bay Street expectations but nonetheless drove up the payout ratio to 132 percent. Guidance is for a rebound and lower payout ratio in coming quarters.

Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF)–To 2 from 3. The real estate investment trust has paid taxes for some time because it didn’t qualify under Canada’s SIFT tax rules. Unfortunately, its fourth-quarter payout ratio was 102 percent, losing it a Safety Rating System point.

New Flyer Industries (TSX: NFI-U, OTC: NFYIF)–To 3 from 4. Fourth-quarter results weren’t wholly unexpected, as sales and backlog suffered from reliance on lower margin orders due to economic turmoil. And the company’s municipal customers aren’t likely to open their wallets much further the rest of the year, as budgets remain stretched. Management, however, has reaffirmed its commitment to the current dividend level, making the stock still suitable for aggressive investors.

Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–To 3 from 2. The fuels distributor finally caught a break in the fourth quarter, as its payout ratio fell to just 58 percent. Refiner margins improved, weather cooperated and the company successfully completed its system-wide integration plans.

Name and Symbol Changes

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 didn’t 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 still haven’t 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.

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 CE Weekly 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.