For all too many investors there’s no middle ground. They’re either all in or all out. And with the worry meter once again in the red zone many are heading for the exits, taking what they can for what they own.

A soft economic environment like this one inevitably produces horrific results for a handful of unlucky companies. That’s the case for Yellow Media Inc (TSX: YLO, OTC: YLWPF), as Dividend Watch List discusses, and there will no doubt be more.

The demise of the few as businesses in turn will cause at least some investors to lose faith in any stock considered similar. For some, that could be anything trading in Canadian dollars, including companies posting clearly bullish second-quarter business numbers. And my experience from other bear markets is some readers will conclude they need to sell all of my recommendations.

The silver lining is that kind of selling never leaves a permanent mark, unless the company in question really does crack. In fact, so long as the business numbers are affirming strength you rarely get a better opportunity to buy high-quality companies on the cheap.

That appears to be the case with both of the August High Yield of the Month recommendations, Extendicare REIT (TSX: EXE-U, OTC: EXETF) and new Aggressive Holding Student Transportation Inc (TSX: STB, OTC: STUXF).

Both stocks have moved sharply lower in recent weeks and are actually underwater for the year in Canadian dollar terms. Both, however, are still very sound fundamentally with growing business niches, strong balance sheets and well-protected dividends. And after the past few weeks’ selloff, they yield 10.5 and 9.5 percent, respectively, paid monthly.

Extendicare shares have been subjected to wild volatility–mostly to the downside–since Medicare announced a 11.1 percent reduction in payments to nursing homes.

The company operates long-term care facilities offering sub-acute care and rehabilitative therapy services in the US and Canada, with the majority of its operations south of the border (75 percent of revenue). Medicare funds made up an estimated one-fourth of the company’s total revenue during the most recent quarter.

Prior to the Medicare announcement–which cratered some industry stocks 50 percent or more in a single trading day–Extendicare management had been talking about raising dividends once Medicare policy was settled and uncertainty eliminated. The primary reason was a massive and highly successful refinancing of some CAD639 million of debt with CAD563 million over 80 mortgages insured by the US Dept of Housing and Urban Development, as well as USD76 million in cash.

The move will lower future annual interest costs by USD14 million as well as lock in low interest rates averaging 4.5 percent. Meanwhile, a parallel debt repayment effort will leave the company with 44 centers with a value of USD300 and no attached debt.

The Medicare rate cut will force the company to make adjustments. At 11.1 percent, however, it’s still slightly less than the initially proposed 11.3 percent that CEO Tim Lukenda commented on during the company’s first-quarter conference call. Details of Extendicare’s response are highly uncertain, and management may or may not have all the answers investors want when it releases earnings and holds its second-quarter conference call on Aug. 9.

On the other hand, given the numbers here it’s likely that whatever their professed disappointment with the ruling in the press, management must have been considering a plan of action should the ruling come in close to an 11.3 percent cut. Also, the payout ratio prior to the proposed cut–and prior to the refinancing efforts–was only 68 percent in the first quarter of 2011.

Canadian operations are growing nicely. And the company also has numerous options for cost cutting to mitigate the impact of the rate cut, which again it’s doubtless explored in recent months.

There’s also the possibility the company can make up lost revenue in rates with growing volume, as North America’s population continues to age. And the growing move toward providing “skilled” services also liberates revenue from regulation to some extent.

On the negative side, there are also cost pressures on the Medicaid system via the states. Medicare cuts may or may not be on the table as Congressional negotiators try to trim USD1.8 trillion in costs over the next 10 years. As some analysts have pointed out, the company has historically used more debt financing than many rivals, and the plans to cut it may have to be curtailed due to this rate cut.

Certainly Mr. Lukenda didn’t mince words in his response to the Medicare announcement, charging the reductions “threaten to destabilize the post-acute care sector (and) are disappointing to say the least” and labeling them “ill-considered.”

On the other hand, Mr. Lukenda also stated “we believe Extendicare is a financially stable company with a conservative capital structure and payout ratio” and that the company’s “ownership of our real estate assets coupled with our geographic diversity position us favorably to address these challenges.” He went on to state that the company “may be able to mitigate” at least some funding reductions “through the implementation of specific operating plan changes.”

No doubt we’ll find out more on Aug. 9. But now trading with a yield of more than 10.5 percent and at just 32 percent of sales, Extendicare is certainly pricing in a lot of bad news that hasn’t yet occurred, including a dividend reduction. Moreover, the company has been able to maintain its dividend for nearly three years as a “specified investment flow-through” entity (SIFT), demonstrating financial skills as well as the ability to think outside the box.

The most conservative investors may not want to buy before the August 9 earnings report. But the current price is very attractive, and my buy target for those who don’t yet own Extendicare REIT is all the way up to USD12.

Student Transportation traded as high as USD12 per share prior to the 2008 crash. Then came the company’s decision to restructure as an ordinary corporation rather than an income participating security (IPS) combining parts of debt and equity. Starting Aug. 4, 2009, the debt portion was stripped off the equity portion and began trading separately. That concluded a process that began in March 2007 with the issuance of common shares.

Today the debt portion–which once paid out at 14 percent a year–has been fully retired, with a face value of CAD3.847. All that remains now is the common stock, which continues to pay out at the same CAD0.046368 monthly rate it has since October 2006, when it first started trading separately.

As one of the first former income participating securities deconstruct, Student Transport took a lot of heat from investors who had become attached to its extremely high yield. The result is the share price has largely struggled since, crashing hard in 2008, recovering somewhat from a July 2009 low before tailing off this summer.

Ironically, the company has continued to gain scale and strength throughout, even while continuing to pay a generous monthly dividend and bringing down its once-prodigious debt load. I’ve periodically recommended the company as a buy in How They Rate on the basis of yield and generally steady business results. This month, however, two developments caught my eye as I began looking for a replacement for the failed position in Yellow Media.

First was the company’s signing in early July of a “letter of intent” to acquire four school bus companies, which will add more than 150 vehicles and annualized revenues of over USD7.8 million. The purchases are slated to close this month, prior to the start of the school year, and they will be immediately accretive to cash flow at close. In the words of CEO Denis J. Gallagher, they’ll also “strengthen our existing operating locations by adding regional density to those areas.”

That says three things to me. One, Student Transportation’s management is opportunistic and ready to grow in an environment rivals are pulling back from.

Second, the company has market intelligence to do deals that both add to near-term profits and flesh out its long-term platform for growth, in this case by adding scale.

And third, the company is capitalized well enough to continue doing any deal it wants, even as many rivals may be finding it hard to arrange survival financing. It doesn’t hurt to be able to raise money in Canadian dollars, either, the purchasing power of which is nearing all-time highs in US dollar terms.

In the release announcing the acquisition, Student Transport management stated “with the contract wins recently released and the year over year built in growth from several acquisitions closed in fiscal year 2011, the company is poised for over 11 percent year-over-year growth in revenues already before the new school season starts.” Mr. Gallagher also affirmed the company’s “growth pipeline remains robust and out contract bid and renewal season went very well.” That led him to predict “another solid year in fiscal 2012.”

In a very real sense, Student Transportation is uniquely positioned for an environment of tightened federal government spending, which, in turn, has put state and local budgets in a squeeze. That’s because it offers school districts and states–which still own two-thirds of school buses in the US–an opportunity to cut costs by contracting out services. And the larger it becomes by adding new contracts and acquisitions, the better the company’s ability to utilize economies of scale to secure high-profit-margin contracts even while offering critical savings to school districts.

We saw this positive dynamic produce very strong results for the company’s fiscal third quarter (ended Mar. 31). Particularly volatile fuel costs and snow removal costs slightly crimped profit margins per unit of revenue. But revenue still surged 17 percent, while cash flow rose 4.7 percent. Nine month revenue, meanwhile, surged 13.8 percent, while cash flow is up 8 percent. Finally, Mr. Gallagher has affirmed the company’s full-year results will be in the range of historical profit margins (17 to 20 percent) as well as the target payout ratio of 82 to 85 percent of distributable cash flow.

Financing needs remain generally modest as are outstanding debt balances of CAD217 million at last count. The company has refinanced its credit agreement through Feb. 4, 2016, and a senior note set to mature on Dec. 14, 2011. Lease financing rates, meanwhile, are running between 3.5 and 5 percent for an average of six years maturity. With the refinancings this year the company has no maturities until Oct. 31, 2014, giving it a lot more room to make accretive deals, and meet management’s continued robust annual target of 11 percent-plus revenue growth, with commensurate margin growth.

That’s a compelling package, particularly when it comes with a well-covered yield of more than 9.4 percent paid monthly. But there’s more.

My second reason for taking a closer look at Student Transportation is management’s plans to list in the US on the Nasdaq, using the same “STB” as the company uses on its home Toronto market. The company’s current share base is roughly 15 percent US, even though the lion’s share of its operations are south of the border.

A listing is likely to do the same thing for this company that it did for another Canadian Edge favorite, Atlantic Power Corp (TSX: ATP, NYSE: AT), opening a whole new array of opportunities for growth. And management is certainly ambitious, having tripled the size of the company since its initial public offering in 2004.

Moreover, listing now in the US also affirms in a very real way the security of the company’s monthly dividend. Mr. Gallagher has stated the company’s dividend is “a commitment to the shareholders” and a vital part of its growth strategy, just as it is with Atlantic Power. That’s once again thinking outside the box, and I’m happy to get a piece of the action for the Canadian Edge Portfolio. Buy Student Transportation all the way up to USD7 if you haven’t yet.

What can go wrong at Extendicare and Student Transportation? With Extendicare we’re going to know pretty quickly, as the company makes clear what its plans are to mitigate the Medicare cuts. I’ll obviously be very dismayed if any moves involve a dividend cut. My expectation, however, is the company won’t boost the payout and will announce a detailed plan for cost reduction. Again, we’ll know more next week.

As for Student Transportation, the potential for a sudden spike in fuel costs is probably the biggest vulnerability. I’m a bull on energy for the long term, and my view remains we won’t see the end of this now decade-long uptrend until there’s meaningful conservation and a real switch to alternatives on a global scale that changes demand patterns as well as meaningful new low-cost supplies. And I see no evidence of any of that now.

On the other hand, the company can certainly pass through fuel costs changes over the longer haul. And it’s capable of mitigating the impact on overall profits and margins when spikes occur, as it showed by still posting positive cash flow growth earlier this year.

Again, nothing is forever in investing. We have to watch the numbers every quarter to determine if the stocks we own are still worth holding or if we should move onto something else. At this juncture, however, both of these companies look cheap, and their prices more than reflect any reasonable risks.

For more information on these companies go to How They Rate and click on their names to go directly to their websites. Extendicare is covered under Health Care. Student Transportation is tracked under Transports. 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. Extendicare has a market capitalization of roughly CAD666 million, while Student Transportation comes in at about CAD405 million. Both stocks trade with good volume on their home market, the TSX. Trading is less brisk under the US over-the-counter (OTC) symbols but should still be adequate. And note that Student Transportation’s liquidity is about to surge as it wins a Nasdaq listing.

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, and dividends paid into a US IRA by Student Transportation are not subject to 15 percent Canadian withholding tax. Extendicare is still a SIFT and is taxed as such in Canada. It shouldn’t be withheld from IRAs, but you may have to fight your broker to get the right treatment.