One of them yields around 5.3 percent and in the last 12 months grew its dividend 17.6 percent. The other throws off nearly 9 percent and is rapidly reviving its own growth after successfully weathering a period of intense competition in its industry. Together, they’re a formidable combination of buys for High Yield of the Month, promising robust total returns with low risk in a rising price market.

The first is Ag Growth International (TSX: AFN, OTC: AGGZF), an Aggressive Holding and maker of grain-handling equipment that’s almost doubled our money since added to the Portfolio in February 2008. It’s back below my buy target once again, offering another chance to get in.

The other is Colabor Group (TSX: GCL, OTC: COLFF), a leading wholesaler of both food-related and non-food products serving mostly Quebec and parts of Atlantic Canada. It’s also handed us a near 100 percent total return since added to the Conservative Holdings in May 2009. It, too, is trading below my target, just at the time, oddly, that the underlying company appears to be returning to robust growth of prior years.

Ag Growth’s grain-handling equipment business has evolved and strengthened both by product line and geographic reach in recent years. As I reported in a Mar 16 Flash Alert, fourth-quarter and full-year 2010 results were strong, with cash flow surging 45 percent adjusted for non-recurring items. Moreover, management indicated order backlog is at a “considerably higher” level than a year ago, which will drive sales and cash flow in 2011.

The company’s primary business is now in the US, a huge market undergoing a massive boom due to government-mandated sales of ethanol for gasoline as well as Asia’s growth. North America’s growing ability will be even more critical to keeping the world fed in the wake of Japan’s historically destructive earthquake and tsunami, which has been followed by ongoing ecological woes at the Fukushima-Daiichi nuclear reactor complex.

Management continues to take a generally cautious view on its market, noting the record harvests of recent years. As a result, its forecasts for robust growth are mainly based on its recent moves to expand production capacity, including the construction of new storage-bin manufacturing capacity in Alberta and the acquisitions of three smaller, related companies.

One of the latter is a grain-drying company based in Finland, which dramatically expands Ag Growth’s presence in European markets. The company has already won a project in Siberia, with the promise of much more to come. Another purchase is of a company based in Wichita, Kansas, which expands both US and other international capacity. And the third deal has pumped up Ag’s welding and fabrication capability in Canada’s grain belt.

All three additions promise to add meaningfully to 2011 production ability, which should pay off as higher revenue and cash flow in another robust year for the agriculture business. And management is focused on investing a similar amount to last year’s CAD60 million in new projects this year to fuel future income. In contrast, maintenance capital spending–what it takes to run the business–is only about CAD3 million. Growth capital spending excluding acquisitions is anticipated at CAD6 to CAD8 million.

The package is a company with a high yield and management that’s positioned it to grow along with surging global demand for grain. We may not get 17.6 percent dividend growth every year. But even a more modest pace should ensure double-digit annual total returns for years to come.

The lion’s share of Colabor’s prospective total return in 2011 is likely to come from its lofty dividend of nearly 9 percent. After that, however, it should increasingly be spurred by a return to growth in cash flow and dividends, as market conditions improve and the company continues to gain share with acquisitions.

In the last six months the company has completed two major purchases, RTD Distributions and Norref. Both deals should help improve margins and volumes by enabling greater penetration of existing markets and potential expansion into new ones. Norref adds the leading importer and distributor of fresh fish and seafood products in Quebec and the Ottawa region to the company’s stable, with annual sales of approximately CAD113 million.

Last month Colabor did a slightly different kind of deal, announcing the purchase of assets run by its affiliate Edfrex. That company specializes in distribution of food products and food servings to a range of businesses, including convenience stores and restaurants. It also owns a 96,000 square foot food distribution center in New Brunswick, and a fleet of 15 trucks servicing about 2,800 customers with 8,000 products.

The deal ramps up the company’s direct presence in Atlantic Canada. Such transactions between affiliated companies must meet a different set of standards. These concerns appear to have been easily resolved, however, as independent directors have already signed off on it.

Low-cost capital is essential to any company growing via such purchases. Colabor’s other super news this month was securing a new banking commitment for credit facilities totaling CAD150 million for a new five-year period. In management’s words, the new terms “will offer more flexible financial terms, resulting from more accommodating ratios following the completion of acquisitions.”

That’s about the surest indication one will find that Colabor intends to continue buying companies and consolidating what’s still a widely dispersed industry. One such potential deal is the company’s offer in late March for SKOR Food Service, a food distributor serving Ontario and parts of Quebec.

If the company’s offer is successful, Colabor will pick up nearly CAD140 million in annual sales, boosting overall revenue by more than 10 percent. Equally important, the added territory appears to be complementary to Colabor’s existing service territory in Ontario, while further boosting its market share in Quebec.

SKOR’s board has unanimously agreed to support the offer, and two shareholders have irrevocably agreed to tender shares totaling 60 percent of the total outstanding. As only 66.7 percent are needed, that makes the deal a lock for completion by early May at the latest, to begin contributing cash flow to second-quarter 2011 results.

As I noted in a Mar. 10 Alert, Colabor’s fourth-quarter earnings were still negatively affected by the loss of a major contract last year, as well as soft markets and a dispersed market where competition is steep. For Colabor’s part, losing customers is relatively rare. Rather, customers must compete for sales, and when they lose so does Colabor. That threat has forced the company to adjust pricing in several markets over the past year, notably Quebec City.

Management stated in its fourth-quarter conference call that “the recovery in our sector remains fragile.” However, there are definite signs of a turn. Fourth-quarter comparable sales–taking into account a different number of days per quarter–were up 0.9 percent. Sales in Quebec in the distribution segment were actually up 3.4 percent, offsetting a drop in wholesale revenue due to competitive pressure.

Thanks to aggressive inventory management, profit margin also remained relatively steady. That should be enhanced by greater economies of scale because of the recent acquisitions. The company has also renegotiated and extended a contract with its union in Quebec City. And adding more centers also potentially reduces fuel costs by cutting driving distances, though much of these expenses are automatically recovered in surcharges to customers and therefore don’t directly impact Colabor’s profits.

Dividends continue to be well covered at 77 percent of cash flow. They’re not likely to be increased until cash flow takes a definite turn upward. But with growth now moving in the right direction, we likely won’t have long to wait. And meanwhile the hefty current yield is a powerful incentive to buy and stick around.

What could go wrong at Ag Growth and/or Colabor? Both proved their ability to hold dividends steady during the 2008-09 credit crunch and market crash as well as the North American recession that followed. It’s equally undeniable, however, that both companies would do better if the economy continues to grow.

Colabor is only now making up for the shortfall from last year’s lost contract with a combination of organic growth of existing businesses and acquisitions. Ag Growth’s main products, meanwhile, are grain-handling equipment that’s in demand when North American agriculture is healthy, which is, in turn, increasingly dependent on food and energy demand from Asia and emerging markets.

Both companies’ ability to grow could also be challenged by stirring inflation. Ag shares, for example, declined last month mainly on concerns that rising global steel prices would push up its costs and pressure its profit margin, should it be unable to pass the prices through to buyers of its equipment.

Ag also garners a large percentage of revenue in US dollars, meaning it must hedge effectively or else revenue will drop in Canadian dollar terms. Expected US dollar revenue is largely hedged for 2011. But management is taking a wait and see attitude for 2012 and beyond.

Colabor’s contracts mostly do factor out changes in item prices. But it’s always more competitive when such costs are lower, competition remains considerable in several of its markets.

Ag can also be hurt when weather doesn’t cooperate. In 2010 unprecedented flooding in several regions caused a poor harvest in Canada. That, in turn depressed demand for grain-handling equipment, with a direct impact on company sales. And it was entirely outside Ag’s control. Like any company making many acquisitions consecutively, Ag and Colabor are always at risk to missing some hidden flaw when they take on new assets.

That being said, both stocks are most assuredly not priced for perfection, particularly Colabor, which is yielding close to 9 percent and selling for just 25 percent of annual sales.  Both companies have proven they can handle adversity of the worst kind. And whatever risks they pose are dwarfed by potential upside.

Buy Ag Growth International up to USD50, Colabor Group up to USD13.

For more information on Ag Growth and Colabor, see How They Rate. Click on the trusts’ names to go directly to their websites. Ag is covered under Natural Resources, while Colabor is tracked under Food and Hospitality. Click on their US symbols to see all previous writeups in Canadian Edge and its weekly companion CE Weekly. Click on the Toronto Stock Exchange (TSX) symbol to go to their Google Finance pages for a wealth of information, including news releases, fundamental data and price charts.

Both companies are in the lower mid-cap range. Ag Growth has a market capitalization of about CAD574 million, while Colabor comes in at CAD282 million. Both stocks trade with good volume on their home market. Trading is less brisk under the US over-the-counter (OTC) symbols. As these represent merely the TSX listing traded between US brokers, however, this should not be a hurdle to trading.

Any broker should be able to buy either stock for you. Note that US investors are generally not permitted to take part in secondary offerings or dividend reinvestment plans.

Distributions paid by both companies should be considered 100 percent qualified for US tax purposes. Ag completed its conversion from an income trust to a corporation on Jun. 9, 2009. Colabor completed its conversion on Nov. 2, 2009. Both were cut-less conversions, demonstrating the underlying strengths of the companies.

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. 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.