Dividends of 7 to 9 percent backed by companies with reliable and relentless growth: That’s a tough combination to beat in any market. And it’s the hallmark of July 2011 High Yield of the Month selections Atlantic Power Corp (TSX: ATP, NYSE: AT) and Parkland Fuel Corp (TSX: PKI, OTC: PKIUF).

Powerful recent gains have been my main reservation recommending Atlantic in recent months to new buyers. The stock is more than three times the price at which it touched bottom on Nov. 21, 2008, ironically the day the company last increased its distribution to the current monthly rate of CAD0.0912. Meanwhile what was once a double-digit yield now ranges between 7 and 7.5 percent.

To be sure, Atlantic’s management has continued to build value the past two-plus years, largely through acquisitions but also with the development of biomass power plants through its Rollcast unit.

Earnings numbers and quarterly conference calls have dutifully reflected continued progress in these ventures, which in the past 12 months have featured the purchase of a stake in a major Idaho wind power plant, the Cadillac biomass plant in Michigan and the on-budget, on-time construction of the Piedmont Green Power biomass plant in Georgia.

The Idaho Wind Project and Cadillac plants are now contributing to cash flows, while Piedmont is expect to start up in 2012. Together, they’re set to contribute meaningful cash flows to Atlantic, sharply reducing a payout ratio that’s inflated in the near term by the cost of getting them on stream.

Their prospective contribution is a major reason why management has the confidence to forecast the dividend rate will hold at least to 2016, based solely on cash flows from currently operating assets. And it’s despite uncertainty about the terms of future power-sales contracts from the company’s gas-fired power plants in Florida.

That was the situation for Atlantic prior to Jun. 20, when CEO Barry Welch announced the company’s biggest strategic move yet–the acquisition of Capital Power Income LP (TSX: CPA-U, OTC: CPAXF). Structured as a mix of stock and cash, the USD1.11 billion deals adds interests in 20 power plants and will boost the company’s generating capacity by roughly 143 percent, to 2,116 megawatts.

These new assets are entirely complementary to Atlantic’s. They’re primarily natural gas-fired plants but also include hydro and biomass. They’re geographically diversified, adding Canadian generation to Atlantic’s power mix for the first time, as well as properties in the US Northwest and US Southwest. And their operating rate is superior, coming in at 95 percent of capacity the last 12 months.

The combined company will derive approximately 78 percent of output from gas-fired plants, with 9 percent from biomass, 6 percent hydro and 2 percent wind. That takes coal down to 5 percent, a percentage likely to fall further as the new Atlantic expands biomass further. Atlantic will derive about 15 percent of output from Canada and US geographical diversification will ensure against unexpected setbacks on the weather, economic and regulatory front.

The financial strategy under which the plants are operated is also right in line with Atlantic’s. Output is primarily sold under long-term contracts, with an average life of 9.1 years as of late June 2011 for plants with an average “remaining useful life” of 22.6 years. Some 98 percent of output is sold to investment-grade customers, with the balance regulated US utilities–a sector from which not one company has ever defaulted on an contract with an independent power producer. Coupled with the steady revenue from the Path 15 power line in California, that makes for a customer mix about as recession-proof as you can get.

Atlantic’s success in emerging as a major independent power producer under this deal is as much due to hedging out the many risks of this business, from often-volatile energy prices to interest-rate swings. And as a company with almost all US revenue paying a dividend in Canadian dollars, it’s had to be constantly mindful of currency risk as well.

Based on management’s statements, Capital has apparently been running its assets much the same way. Moreover, the deal calls for Capital’s “operating employees” to come over, giving Atlantic expertise operating assets for the first time. It will be interesting to see what this leads to for a company whose total employee pool up until recently could fit into a single room, as it was focused on managing a portfolio of assets rather than actual facilities.

That will no doubt bring its share of challenges. So will the attempt to get this deal done in time for closing in the fourth quarter of 2011. Regulatory requirements include approval of the Federal Energy Regulatory Commission and antitrust review in both the US and Canada. Management will need the OK of a majority of Atlantic shareholders, as well as a majority of Capital Power partnership units not held by the general partner Capital Power Corp.

Finally, Atlantic will have to complete some fairly aggressive financing, including a “permanent target raise” of CAD200 million in new equity and CAD423 million in new debt. That’s currently being covered by a CAD623 million bridge loan courtesy of TD Securities.

An upgrade from two analysts of Atlantic stock is an encouraging sign for the equity side of the equation. The debt side also looks hopeful at this juncture.

S&P has put Capital Power’s BBB credit rating on “credit watch negative,” citing “resource concentration” of the new entity–an absurd contention given the gas focus of both companies–but also the very real fact that Atlantic’s balance sheet isn’t as secure as Capital’s is now.

The actual wording of the opinion, however, leaves plenty of wiggle room for taking no action at all. DBRS, meanwhile, has also put the rating on review for downgrade, but with the caveat that “closing the transaction would likely result in a downgrade of the ratings within the investment grade category.” In other words, the rating may drop, but even then unrated Atlantic will for the first time gain an investment-grade rating.

Timing the needed financing will be critical to the success of this deal. And no doubt, risk-averse Atlantic management will be working overtime to control all the variables–including the remote possibility of a tightening of global credit markets before this deal closes.

Happily, few companies have a better track record than Atlantic of making things happen in bad markets. The November 2008 dividend increase, for example, was funded by the successful purchase of the Auburndale power plant in Florida. That deal closed on Nov. 21, 2008, when credit market conditions could hardly have been worse.

My bet’s on management to pull this one off as well, even if the macro environment gets a bit more difficult in the meantime. And saving the best for last, this deal also comes with a dividend increase to an annual rate of CAD1.15 per share effective at close. That’s good enough for me to raise my buy target on Atlantic Power to USD16.

Acquisitions are also the key to Parkland Fuels’ torrid growth rate of recent years. The company completed another big deal in late June, finalizing the purchase of Cango, a major independent marketer of fuels in Ontario. Cango supplies more than 400 million liters of petroleum products to a network of 155 retail sites and 126 dealers, dramatically boosting Parkland’s sales and supply position in the province.

The deal and another one that added seven Save on Fuels retail fuel outlets in Ontario cost the company approximately CAD22 million. That cost will likely dilute near-term earnings.

But thanks to a successful CAD86 million equity financing in May–up-sized from an initial goal of CAD75 million–it won’t take long for some serious cash flow accretion to lift profits sharply.

That’s precisely what happened in the first quarter of 2011, as Parkland realized the benefit of deals it completed over the prior 12 months, including the Bluewave deal that transformed it into a nationwide marketer.

The company is in fact now the largest independent marketer and distributor of fuels, taking full advantage of companies like ExxonMobil’s (NYSE: XOM) eagerness to farm such non-core businesses out. And management continues to hunt down new deals on scale as wide as Canada itself.

During its first-quarter conference call in late May Parkland management made note of, in CEO Bob Espey’s words, “multiple capital initiatives.” These are likely to be in three major areas. One is “organic” deals that add assets and operations to existing fuels marketing and acquisitions that add other marketers as what’s still a fragmented industry consolidate.

Parkland currently “touches” just 5 percent of the fuel in Canada’s downstream market, according to Espey, leaving a lot of room to grow. The CEO stated particular interest in working deals with Super Oils like Royal Dutch Shell (NYSE: RDS/A) and Exxon-controlled Imperial Oil Ltd (TSX: IMO, NYSE: IMO), though he also noted these companies “are not in a position at this point to divest,” meaning investors need to be patient.

The second is strategic moves that improve the company’s ability to manage supply and therefore what are often volatile energy costs. Currently, a third of the company’s supply portfolio is with a single company, Suncor Energy Inc (TSX: SU, NYSE: SU), though that’s not surprising, considering that giant’s strong position in Canadian refining. But reducing that dependence is something the company continues to work on.

Finally, the third initiative is to cut costs and improve efficiency by looking for ways to things better. This Parkland has done over the past year in a massive, company-wide effort. But as it continues to grow with acquisitions, such innovation will be critical to keep going.

All three factors were instrumental in the company’s very strong first-quarter numbers, which I reviewed at length in a May 13 Flash Alert. And they should be again in the second quarter, which because of seasonal factors is typically not as robust as the first and fourth quarters. The third quarter is also usually seasonally not as strong.

That being said, I still expecting to see solid results on many fronts for Parkland when it announces its second-quarter earnings on or about Aug. 12. And it should continue to benefit from a generally strong environment for fuels, due to increased economic activity in the markets it serves.

The payout ratio will likely be a bit higher for the quarter than the 43 percent from the first quarter. But coverage should still be solid, particularly factoring in the impact of the very popular dividend reinvestment plan (available for Canadian investors).

With conversion to a corporation so recent, the subject of potential dividend increases did not come up during the first quarter conference call. But the longer this company puts up strong numbers, the greater its ability to boost its payout will become. Meanwhile, 8 percent-plus isn’t too shabby paid monthly. Parkland Fuel is a buy up to USD13.

As I mentioned above, the Capital deal’s success is the key to Atlantic’s future growth. Failure wouldn’t necessarily be disastrous, but it would force management to rescind the dividend increase and raise the stakes a lot more for the renegotiation of Florida power contracts.

Parkland’s greatest risk, meanwhile, is an unexpected problem absorbing one of its acquisitions. But it’s also exposed to energy price swings that affect refining margins and fuel sales. That can make quarter-by-quarter earnings volatile, which is why the stock is an Aggressive Holding rather than a Conservative Holding.

In my view, the potential payoff and management’s track record protecting against vulnerabilities make these risks worth taking. Atlantic’s prospects are no doubt the more certain. But Parkland is a perfectly suitable holding for the safety conscious as well as aggressive income seekers, provided it’s held within a balanced and diversified portfolio.

For more information on Atlantic and Parkland, see How They Rate. Click on the trusts’ names to go directly to their websites. Atlantic is covered under Electric Power. Parkland is tracked under Gas & Propane. Click on their US symbols to see all previous writeups in Canadian Edge and CE Weekly. 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.

Both companies are small to mid-cap stocks. Atlantic has a market capitalization of roughly CAD1 billion, while Parkland comes in at about CAD811 million. Atlantic should double in size with the Capital Power deal. Both stocks trade with good volume on their home market, the TSX. Trading is less brisk under the US over-the-counter (OTC) symbol for Parkland. Atlantic, however, now trades on the New York Stock Exchange (NYSE).

Whether you buy these stocks in the US or Canada, you get the same ownership of a solid, growing and big-dividend-paying company. Your dividends will be paid in Canadian dollars, and US investors will score capital gains when the loonie rises against the greenback.

Distributions paid by both companies are 100 percent qualified for US tax purposes. Parkland completed its conversion from an income trust to a corporation on Dec. 31, 2010. Dividends paid into IRAs from the Feb. 5, 2011, payment on aren’t subject to 15 percent Canadian withholding tax.

Atlantic completed its conversion from an income deposit security–a single security combining debt and equity–into a corporation on Nov. 30, 2009. Everything from the Jan. 29, 2010, payment on shouldn’t be subject to Canadian withholding tax. Before that, the dividend was roughly 60 percent debt interest, which was also exempt from withholding tax.