Stock prices rise and fall for many reasons in the near term. That also goes for shares of companies that pay dividends.

If you’re a dividend investor, however, the only really important lesson to draw from the market’s inevitable downtimes is that strong companies always survive. Sometimes full recovery takes months, even years if the debacle was bad enough. But as long as their underlying businesses remain solid and they maintain (or, better, increase) dividends, that recovery is assured.

In fact, it’s fair to say that, paraphrasing Friedrich Nietzsche, that which did not kill them made them stronger. Things did get hairy during the crises themselves. But once the clouds blew away, their stocks eventually pushed on to higher highs in better shape and more valuable than ever.

That was definitely the case for strong Canadian companies following the 2008-09 crash, by far the worst calamity in the markets since the launch of this advisory–and by many measures the more destructive since 1929. And as longtime Canadian Edge readers know, it was also the case after Halloween 2006, when the Canadian government’s announcement of new taxes triggered a two-week selloff of income trusts.

The only real losers from these selloffs were investors who sold positions in strong companies into panic, rather than wait on the recovery. And unfortunately for more excitable investors, temptation to sell is always strong every time there’s a challenge to the economy or credit markets.

The current global selloff in stocks is such a time. Washington’s struggle the past few weeks to vote an increase in federal borrowing limits has clearly unnerved the market. Politicians did reach a deal this week that eliminated the risk of a US government default. Now, however, fears appear to have shifted to worries about a potential slide into recession, triggered (ironically) by a drop in federal spending in the US and Europe–which has its own sovereign debt woes.

Such is the news cycle in the financial TV, which seems to always require a crisis on which to focus viewers’ fears, and thereby keep them watching. For those investors who do tune in, it’s a constant clarion call to make emotional and therefore highly destructive portfolio moves.

Fortunately, I have the antidote: actual financial results from dividend-paying companies. And for those who can tune out the blather about the financial media’s fear du jour, we now have a fresh batch of numbers to consider from the second quarter of 2011.

As longtime CE readers know, the health and growth prospects of underlying businesses are our primary concern here. That’s what determines dividend safety and growth as well as every company’s ability to recover from stock market declines.

I’m not really concerned with whether a company met some nebulous analyst forecast or consensus expectation for a given quarter. I am concerned with what the actual reported numbers behind the bottom line say about the company’s ability to pay a rising stream of dividends going forward. As long as those are solid and pointing the right way, I’m content to keep holding the stock in our model Canadian Edge Portfolio.

When I’m Wrong

The converse of that rule is to sell when the actual results don’t measure up. One sign of weakness I’ve almost always heeded is an actual dividend cut–and I’ve almost always been burned when I haven’t.

But the more important benchmarks have to do with management’s own targets. So long as those are met I’m usually willing to give the company the benefit of the doubt, even if other market participants are not. When management is forced to admit defeat, however, I’m out–no exceptions and no matter how bad the losses may be to that point.

I’m willing to accept the consequences of being wrong for two main reasons. First, the upside from being right when others are betting the other way is about the best you’ll be able to find in any market. Unlike many participants, I focus on the health of individual companies primarily, rather than the big picture from 30,000 feet. Sometimes that means I’m too close to the action to see clearly. But I’m also more likely to notice something someone else may overlook.

Second but equally important, I keep my overall CE Portfolio exposure low for any individual stock. I do that mainly by always advising a diversified and balanced portfolio. Whenever a subscriber asks about my one “favorite” stock, for example, I always give at least two. Yes, that’s hedging, I’ll admit. But then, any successful portfolio will always be hedged–that’s the only way to guard against the expected, which as any experienced investor knows is the rule not the exception for financial markets.

I also never, ever recommend doubling down on a falling stock. Some investors claim they’ve had great success adding to positions and lowering their “cost basis” when share prices fall. That’s no doubt true most of the time if you’ve really chosen a high-quality portfolio. In fact, as I wrote above, the strong always survive and recover.

Unfortunately, no one has perfect knowledge. We’re buying stocks of companies run by human beings. If calculated legally and accurately, the numbers are the single best source for how underlying businesses are doing–and they are so presented 99 percent of the time, if for no other reason than the penalties for fraud are increasingly severe.

That other 1 percent, however, can wipe you out. And even the strongest-looking company can stumble if external conditions get bad enough, or if there’s some unexpected development.

Worst of all, doubling down is inherently an emotional move for most investors. And emotional moves have done more damage to more portfolios historically than even the worst bear market.

It starts like this. A stock plunges for one reason or another, disturbing investors’ comfort level. Their first response rightly is to find out what happened and if it’s a threat to dividends. Sometimes, the event will be severe enough to merit a sale. More often than not, however, if it’s a high-quality company the selloff will be due to something a good deal more ephemeral, possibly just negative action in the overall market.

Just sitting back and doing nothing in that case is often the hardest thing to do. It is, however, the only unemotional move, and therefore the only right one. Putting more money into the stock will no doubt feel good, and it may pay off. But if things go the other way–even for a short time–the double-down investor will only get more emotional, and therefore even more prone to error.

If you do insist on loading up on any falling stock, recognize that I’m not with you, no matter what the stock is. Rather, my advice is when you’re investing new money, look for something you don’t already own. That’s the only 100 percent certain way to always avoid putting good money after bad. And the more you diversify, the less risk an unexpected disaster in a single stock can take down your portfolio.

If you’ve followed this approach, this month’s Portfolio move shouldn’t be too painful: Sell Yellow Media Inc (TSX: YLO, OTC: YLWPF) and replace it with High Yield of the Month Student Transportation Inc (TSX: STB, OTC: STUXF).

In retrospect, this is a move I should have made some time ago. What kept me in the stock–as I explain in Dividend Watch List–was management’s consistent line that it was successfully transitioning its business to the Internet faster than it was losing business at its traditional print directories. And up until now that contention was very much backed up by its earnings numbers.

Unfortunately all that appears to be out the window with management’s announcement this week of a cut in its cash dividend to an annualized rate of CAD0.15. That’s down from CAD0.65 per share per year. The move follows the completion of the sale of the company’s Trader Corp assets, which netted it CAD708 million for debt reduction.

Yellow management had long maintained the sale would be enough to right its finances. But a sharp drop in second-quarter adjusted earnings per common share to CAD0.17 from CAD0.27–and a 4.8 percent drop in revenue–seems to indicate the company’s critics had it more right than management. So does the dividend cut, which goes against everything the company has been telling its shareholders this year about its prospects.

I hate taking a loss as much as anyone else–and I’ve ridden this one down a long way to be sure. But clearly my basic premise for holding Yellow–that management was right and its critics wrong–no longer exists. In my view, that’s when you cut your losses and move onto something more promising.

Paying a monthly yield of around 9 percent, Student Transportation is one such stock. A new addition to the Aggressive Holdings, the company’s student-focused bus service franchise appears well suited to take advantage of the need for school systems to cut costs. The company is also planning a Nasdaq listing in the US. Buy Student Transportation up to USD7.

This month’s other High Yield of the Month is Extendicare REIT (TSX: EXE-U, OTC: EXETF). The company’s stock price has been hit by the selloff in US nursing home operator stocks, due to an unexpected 11.1 percent cutback in Medicare payments to that industry. Its dividend and financial strength, however, still appear well protected.

I’m definitely not advising that anyone who owns these stocks should really load up. Rather, if you have spare funds to invest take a look at the other companies whose earnings I highlight below. Note that results for ARC Resources Ltd (TSX: ARX, OTC: AETUF) and Daylight Energy Ltd (TSX: DAY, OTC: DAYYF) are reviewed in this month’s Feature Article.

With the exception of Yellow Media, every other Portfolio Holding reporting second-quarter numbers thus far has met management’s targets and demonstrated the health and growth potential of its underlying businesses. Even Colabor Group Inc (TSX: GCL, OTC: COLFF)–which I had downgraded to a hold following its announcement of disappointing first-quarter earnings–came in with numbers that improved enough to restore it to a buy.

Of course, what goes for any other Portfolio stock also goes for Colabor. If you already own it, look for something else among the companies highlighted below. All offer the same wealth building combination: Cash flow growth equals dividend growth plus capital gains.

My expectation is that all will deliver it. But if one should falter, owners of a diversified and balanced basket will still win. Those who emotionally attach to a favorite may lose big.

De Minimis Debt

The threat of a sharp, near-term tightening of credit markets has receded somewhat. Balance-sheet strength, however, is more important than ever, as an era of less-than-accommodative fiscal policy accelerates deflationary pressures around the world.

There are many ways to measure financial power. One is the debt-to-assets ratio shown in the Canadian Edge How They Rate table. Generally speaking, the lower that number is the better for a company’s financial health.

Because different industries support varying levels of debt healthily, however, the relevant comparison is between companies in the same industry. A pipeline operator, for example, can support a much higher level of debt than a producer of oil and gas, as its revenue is much more predictable and less variable.

The other key measure of financial strength is exposure to refinancing pressures. Companies with outstanding maturities totaling 10 percent or less of market capitalization will be able to handle a refinance even under the worst of circumstances without any real pain. Those with maturing debt through 2012 between 10 and 20 percent are slightly more at risk, but should still have little difficulty as well.

Here once again is how our Portfolio picks break down. The first number shows total maturities of debt and credit lines through December 2012. The second shows that number as a percentage of market capitalization. The third figure is the date of the first maturity along with the amount.

The ideal numbers are, of course, zero. But companies that lack maturities in 2011 are in pretty good shape for anything. And any company with less than 10 percent of market cap in maturities over the next couple years has basically no real exposure to an increasingly unlikely credit crunch as well.

The other key point is Canada’s economy is generally healthy. There’s no federal budget crunch, and as David Dittman makes clear in the June Canadian Currents, the banks are in good shape to keep making loans.

In fact, as I point out in In Brief, Canadian’s 30-year Treasury bond yield this week fell to its lowest level since the Bank of Canada started keeping records in 1970. The central bank seems likely to raise its own borrowing rates in coming months, in recognition of the country’s strong economy.

But the likelihood of some spike in Canadian corporate borrowing rates seems pretty remote at this point. That means these companies’ remaining refinancing opportunities could well be a major opportunity to slash interest costs to the bone, as Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) and Extendicare REIT have done this summer.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–CAD100 mil, 4.6%, Jan. 19, 2012
• Artis REIT (TSX: AX, OTC: ARESF)–0, 0%, none
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–CAD100, 9.6%, Aug. 12, 2012
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–0, 0%, none
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPUF)–CAD280 mil, 11.6%, Nov. 30, 2012
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–0, 0%, none
• Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF)–CAD36 mil, 7.1%, Jun. 29, 2012
• Cineplex Galaxy Inc (TSX: CGX, OTC: CPXGF)–CAD335 mil, 23.9%, Jul. 25, 2012
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–CAD14 mil, 6.5%, Dec. 31, 2011
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–0, 0%, none
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)–0, 0%, none
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–0, 0%, none
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–0, 0%, none
• Just Energy Group Inc (TSX: JE, OTC: JSTEF)–CAD32 mil, 1.6%, Aug. 25, 2011
• Keyera Corp (TSX: KEY, OTC: KEYUF)–0, 0%, none
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–0, 0%, none
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–0, 0%, none
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–CAD220 mil, 3.2%, none, Jun. 15, 2012
• TransForce Inc (TSX: TFI, OTC: TFIFF)–0, 0%, none

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–0, 0%, none
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–0, 0%, none
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–0, 0%, none
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–0, 0%, none
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)–0, 0%, none
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–CAD60 mil, 14.3%, Apr. 30, 2012
• Enerplus Corp (TSX: ERF, NYSE: ERF)–0, 0%, none
• Newalta Corp (TSX: NAL, OTC: NWLTF)–CAD115 mil, 19.1%, Nov. 30, 2012
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–0, 0%, none
• Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–CAD224 mil, 1.9%, Dec. 31, 2011
• Perpetual Energy Inc (TSX: PMT, OTC: PMGYF)–CAD75 mil, 14.1%, Jun. 30, 2012
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–0, 0%, none
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–0, 0%, none
• Provident Energy Ltd (TSX: PVE, NYSE: PVX)–0. 0%, none
• Student Transportation Inc (TSX: STB, OTC: STUXF)–CAD35 mil, 8.4%, Dec. 14, 2011
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–0, 0%, none

Checking Earnings

As noted above, second-quarter numbers for ARC Resources and Daylight Energy are highlighted in this month’s Feature Article. I’ve also reviewed prospects for other Canadian oil and gas producers, with a focus on the thriving natural gas liquids (NGLs) business.

The Jul. 29 Flash Alert turned the spotlight on earnings from three CE Portfolio holdings, Acadian Timber Corp (TSX: ADN, OTC: ACAZF), AltaGas Ltd (TSX: ALA, OTC: ATGFF) and Colabor Group Inc (TSX: GCL, OTC: COLFF). Numbers for all three painted a positive picture for the health of their underlying businesses, and by extension the safety and future growth of dividends.

To recap briefly, Acadian enjoyed continued robust conditions in global softwood and hardwood sawlogs and pulp markets, partly offset by weather conditions that disrupted normal production. Average selling prices were up 9 percent across all product lines.

Six-month cash flow covered the distribution by a steady 1.02-to-1 margin and free cash flow rose 52.9 percent. That supported the more than quadrupling of the quarterly dividend in April. Cash flow margins also rose and management was able to keep a rein on costs.

The best news on Acadian is it was able to put up these numbers despite the continued weakness in the US, historically the company’s key market for its output. Neither is management counting on a recovery in demand south of the border and it continues to control debt leverage as well. Perhaps the lowest-risk high-yielding bet on timber in the world, Acadian Timber is a buy up to USD13 for those who don’t already own it.

As I wrote last week, the only thing wrong with buying AltaGas now is the share price, which in my view is already reflecting at least one dividend increase. To be sure, second-quarter results were robust, with funds from operations covering the quarterly dividend by a 1.7-to-1 margin. Cash from operations per share rose 41.9 percent, and the company increased capital spending by 84.8 percent, laying the foundations for future growth.

CEO David Cornhill’s timetable for dividend growth is for “modest” increases until 2014, when the completion of a major facility will allow for “acceleration.” That’s enough for a buy target of USD26. But those who don’t yet own this very solid company–now trading a stone’s throw from an all-time high–should be patient for that price point to be reached. AltaGas is a buy up to USD26.

Finally, I’ve been concerned about Colabor’s dividend safety since the distributor of food and related products posted disappointing first-quarter results. The good news in the second-quarter numbers is management seems to have answered most of the questions about its future health, with the numbers generally backing up the guidance it laid down in early May during its first-quarter conference call.

The company’s acquisitions continue to pay off in higher revenue and improved margins. That’s remarkable considering the margin pressures in the overall business, and it affirms management’s skills in spotting takeover targets that improve the company’s position in markets. Building scale by consolidating this diffuse business has long been Colabor’s strategy, and these numbers confirm it remains a robust approach to these markets with great promise.

Conditions aren’t likely to improve markedly for at least the rest of this year. But neither is management banking on that, as it maintains a conservative financial strategy. The only remaining debt maturity between now and April 2016 is CAD14.3 million of a 7 percent convertible note due Dec. 31, 2011. Barring an increasingly unlikely credit event, this should present a solid opportunity to refinance at reduced cost. A convertible due in April 2017, for example, yields just 5.7 percent. And even in a worst-case, the company has more than 10 times the amount of the December maturity in available credit lines and cash.

I’m not looking for a dividend increase here anytime soon. The last was announced in July 2006 and is still the only boost since Colabor’s initial public offering in June 2005. And management has been guarded with its statements about future dividends. That being said, however, the current yield is now roughly 11.5 percent, which prices in a lot of bad news for a company still generating more than enough cash to cover its payout and grow its business. Colabor Group is again a buy up to USD10.

Those were the three companies reporting in July. Here’s my recap of the Canadian Edge Portfolio companies reporting this past week, starting with the Conservative Holdings that turned in numbers.

Conservative Holdings

Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF) posted a 51.2 percent jump in power generation, reflecting the past year’s addition of capacity through acquisitions and new construction of wind facilities as well as improved hydro conditions. The latter were still below the long-term average for the facilities due to weather and water conditions. But the company’s hydro plants are set to run at improved rates in the second half, thanks to better-than-average reservoir levels.

Revenue growth of 83 percent followed the same trajectory as generation, as did net operating cash flow that rose 193 percent. Net operating cash flow per share also nearly tripled, pushing the company’s payout ratio down to 75 percent, the same as the first quarter. Average prices rose 4.8 percent, reflecting built-in contract levels.

Capital spending on new facilities remains the primary driver of Brookfield’s future growth. The company expects to invest CAD27.6 million for the full year, as well as CAD11.2 million on major maintenance initiatives. That excludes spending on the Comber Wind Farm, which totaled CAD112.2 million during the quarter and is by far the company’s biggest ongoing project.

Management states Comber’s construction is progressing on schedule, with nine of the 72 turbines now installed. Connection to the transmission grid is complete and partial energization is expected this summer, with full operations on track for the facility in fall 2011.

As with any company so heavily reliant on capital spending, Brookfield will have a high level of debt at any given time. The company has no major maturities coming due in 2011 at the corporate level, but it plans to refinance a non-recourse project financing of CAD13.2 million related to the Carmichael Falls facility in the coming weeks.

The next big maturity after that will be a CAD280 million first-lien loan connected to a wind venture that comes due on Nov. 30, 2012. And at this point it looks like that will be an opportunity to cut interest costs. The company may be able to do the same with other debt, given that it now holds a BBB (stable) credit rating from S&P and what amounts to a BBB+ rating from DBRS.

With Brookfield, it’s all about executing what amounts to a high-percentage growth plan. There’s still the issue of when this income trust will eventually convert to a corporation. But with no taxes due for some years yet as a trust, there’s also no great rush to do anything.

The stock has dropped rather sharply the past several days and is back to a price where it yields nearly 6 percent. The last dividend increase was back in February 2010. Since then, management has seemed more inclined to put cash flow back into the business, particularly since volatile hydro flows can trigger massive surpluses one quarter and shortfalls the next.

I look for another boost as more projects are completed. In the meantime, Brookfield Renewable Power is a buy whenever it trades below by long-standing target of USD22.

Keyera Corp’s (TSX: KEY, OTC: KEYUF) distributable cash flow per share–the account from which dividends are paid–surged 11 percent from year-earlier levels. That pushed the company’s dividend coverage ratio up to 1.04-to-1 (good for a payout ratio of 96 percent), despite seasonal weakness and scheduled maintenance turnarounds at two major facilities. The payout ratio for the first half of the year came in at 66 percent.

Profits were helped by the completion of the Carlos gathering pipeline, which increased the company’s ability to deliver liquids rich gas to its Rimbey gas plant. It also completed a connection between an Enbridge Inc (TSX: ENB, NYSE: ENB) line and its Edmonton terminal, boosting its presence in diluent storage and delivery and solidifying its place in oil sands refining and services. And it brought its 11th energy storage cavern into service in June. All will boost third-quarter earnings.

Keyera’s current plan is to spend between CAD100 million and CD130 million this year to build new fee-generating energy assets, and potentially more on acquisitions. That should keep throughputs rising even as the company takes advantage of favorable price spreads and robust demand for new energy infrastructure in the areas of western Canada where it operates.

Gathering and processing throughput per day surged 36.1 percent in the second quarter. Net processing throughput per day at natural gas liquids infrastructure moved 15.4 percent higher. And the company enjoyed an 11.2 percent increase in volumes at its marketing division, which is structured to maximize earnings potential of the infrastructure assets. That added up to a 30.1 percent increase in overall revenue.

The company saw very little growth in shares outstanding over the past year (up 3.9 percent). Rather management mostly relied on internally generated cash flows and debt to fund its robust growth plans. That increased net debt by 60.3 percent. That funding decision was partly made as part of company restructuring from corporation to trust. But in any case, Keyera was well equipped to handle the additional obligations, having little debt before. And very reliable assets back the borrowing. The company has no pending maturities until mid-2013.

The bottom line is Keyera still looks set for rising cash flows for the rest of this year and another solid dividend increase early in the next. The stock’s a bit expensive yielding less than 4.5 percent. But Keyera is a buy on any dip to USD38 or lower.

Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF) announced this week that it’s completed its Nipisi and Mitsue pipelines ahead of schedule and on budget. Nipisi is a heavy oil pipeline, while Mitsue will transport diluent.

Both service the Pelican Lake and Peace River heavy oil regions of Alberta. Mitsue commenced operations in mid-June, ahead of schedule, and will contribute fully to third-quarter profits. Nipisi, meanwhile, initiated deliveries in early July, with a full ramp-up expected early in the fourth quarter.

Completing this CAD400 million project is a major milestone for Pembina and its strategy of growing by building and buying needed Canadian energy infrastructure assets. The company last week announced a move to boost it raw gas processing ability by 16 percent at its Cutbank Complex in west central Alberta by mid-2012. And it has numerous other irons in the fire to boost future cash flows.

Asset growth was the key to Pembina’s robust second-quarter results. The company’s adjusted cash flow per share–the key account for dividend safety and growth–rose 43 percent to CAD0.50 per share. That produced dividend coverage of roughly 1.28-to-1 for the quarter, or a payout ratio of 78 percent.

Revenue rose 19 percent, driven by solid results at conventional pipelines and marketing operations. Operating expenses were roughly flat, due to higher labor and power costs as well as maintenance work. Operating margin, meanwhile, rose 26.3 percent.

Continued progress on the company’s construction of new midstream energy infrastructure is critical to future growth. Encouragingly, Pembina is still having no problems pre-contracting new assets before they’re built. A planned CAD75 million plant to expand ethane extraction and processing has already been 80 percent contracted for a planned startup in October. The company is on track to line up the rest for an expected CAD12 million to CAD15 million increase in annual operating margin. The company also has planned CAD40 million investment by mid-2012 in additional pipeline projects.

During a recent analyst presentation CEO Robert Michaleski responded to a question about future dividend policy by forecasting annual growth of 3 to 5 percent after 2012. He also stated a target payout ratio of 75 to 85 percent, with an eye to being a fully taxable corporation starting in 2015. Those expectations are certainly backed up in these very strong numbers.

My only reservation about Pembina Pipeline in recent months has been its share price, which has been consistently above my target of USD25 since late June. My advice is for would-be buyers to wait on that price. I’ll be raising my buy target in tandem with the company’s dividend growth.

RioCan REIT (TSX: REI-U, OTC: RIOCF) reported a 12 percent increase in its funds from operations in the second quarter, or 5.9 percent on a per unit basis. That covers the distribution by a 1.04-to-1 margin and continues a string of solid numbers resulting from the retail center REIT’s concerted expansion of the past few years.

Occupancy improved to 97.5 percent of total property under management, up from 97 percent a year ago. RioCan retained 92.1 percent of expiring leases with an average rent increase of 13.9 percent, a testament to management’s ability to pick high-quality properties in a still highly uncertain operating environment.

The company also continued its robust expansion pace in both the US and Canada, acquiring interests in 18 properties in the first half of the year. A dozen of these are in Canada, which remains RioCan’s primary sphere of operations. The REIT has recently taken a new tack toward expanding in its home country–partnering with large US companies anxious to expand. A deal inked in the second quarter, for example, has made RioCan Target’s largest Canadian landlord.

For its part Target (NYSE: TGT) is now RioCan’s eighth-largest tenant by revenue, though well within company guidelines for not allowing a single payer to account for more than 5 percent of overall revenue. That discipline has enabled the REIT to weather even the most severe market downturns and it’s essential as it expands in the US. National and anchor tenants–the safest accounts in the business–actually increased their share of revenue over the past year from 85.9 to 86.7 percent.

Looking ahead, the larger RioCan becomes using its conservative strategy, the greater its scale and ability to grow even more. And management has proven adept at taking full advantage of still very low corporate borrowing rates, locking in CAD95 million of mortgage financing during the second quarter at an average rate of 4.9 percent and weighted maturity of 6.8 years. Some 92 percent of CAD422 million in credit lines is still undrawn, providing easy funding for more deals.

RioCan units have traded above my buy target of USD25 for most of this year. As of this writing, however, they’ve slipped back below it to a point where they yield closer to 6 percent.

That’s extraordinary value compared to far riskier and lower-yielding US REITs. Those light on RioCan can certainly do a lot worse now than locking away a few shares of arguably North America’s strongest REIT. RioCan REIT is a buy up to USD25.

TransForce Inc (TSX: TFI, OTC: TFIFF) enjoyed a 31 percent jump in its second-quarter revenue, powering 21 percent growth in cash flow and a 20 percent increase in earnings adjusted for one-time items. Per share profit rose 20.8 percent to CAD0.29, producing a payout ratio of just 39.7 percent on the recently increased dividend (up 15 percent).

TransForce’s results build on similarly robust numbers from prior quarters and are the result of the company’s relentless growth-through-acquisitions strategy. Management stuck to its plan through some lean years and, though industry conditions still haven’t returned to pre-2008 robustness, is now realizing the most dynamic growth in the transport company’s history.

The key drivers over the next year will be this year’s addition of Dynamex and the creation of Loomis Express with the acquisition of DHL Express Canada’s domestic operations. Together they’ve dramatically expanded TransForce’s scale and geographic reach. Meanwhile, the company is also realizing solid growth from its Specialized Services segment, which has recently focused heavily on the energy industry.

Another is the purchase of Toronto-based Concord Transportation Inc, inked on Aug. 1. This company specializes in expedited cross-border transportation and offers logistics expertise that should complement the rest of TransForce nicely. Concord’s geography includes Ontario and British Columbia in Canada and Illinois, California and Washington in the US. The deal was consummated in stock, continuing the company’s aversion to taking on extensive amounts of debt.

The company has no debt maturities until July 2013, when a CAD38 million first-lien loan taken on with the Dynamex deal will come due. That’s less than 3 percent of market capitalization and barely 1 percent of current assets. And given management’s track record of paying off obligations early, it will be long gone well before maturity and replaced with something at a lower cost.

The key question for earnings in the next several months is the impact of a still-soft US economy on trucking traffic. But this company is quite well positioned both financially and operationally for sluggish industry conditions, even as it continues its robust growth. TransForce is a buy up to USD16.

Aggressive Holdings

Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) turned in a strong second quarter, with cash flows spurred by higher sales volumes and prices for sulphuric acid. Excluding acquisition costs, distributable cash flow after maintenance capital spending was CAD0.45 per unit. That’s up 55.2 percent from last year’s tally and covers the monthly distribution by a solid 1.5-to-1 margin (a payout ratio of 66.7 percent).

Revenue from the sulphuric acid division surged 27.6 percent during the quarter, boosting cash flow at the unit by 56 percent. Pulp chemicals, meanwhile, scored a 16.1 percent sales boost, though higher costs dragged down unit cash flow by 15 percent. Finally, international division revenue surged 75.4 percent, generating CAD3.9 million in cash flow.

The biggest event at the company during the quarter was the announced agreement to buy all the businesses of Marsulex, other than Marsulex Environmental Technologies. That deal closed was closed in late June. The CAD419.5 million cost has now been partially permanently funded by a CAD149.5 million oversubscribed equity offering, locking in low-cost financing. The company has also sold the petroleum coke business acquired with the deal for USD25.5 million, which was used to pay down debt.

Being able to work this kind of financing in what have been quite turbulent markets is as much as testament to management’s skill as finding the deal in the first place. The next challenge will be to find ways to realize a targeted CAD10 million in annualized savings over the next 18 months.

The company’s track record navigating a wide range of economic environments is a pretty good indication they should be successful. This remains a volatile business, however, and only management’s conservative financial policies have kept the dividend intact the past few years.

That’s why I have Chemtrade in the Aggressive Holdings, despite a consistently low payout ratio, secure niche market and a lack of debt maturities until CAD90 million in Marsulex-related debt must be paid off or rolled over on or by Feb. 28, 2012. On the other hand, there aren’t a lot of companies paying a yield of over 9 percent with that much protection. Chemtrade Logistics is still a buy up to USD15.50 for those who don’t already own it.

Enerplus Corp (TSX: ERF, NYSE: ERF) posted CAD0.98 per share funds from operations in the second quarter. That’s excluding a CAD43 million US tax charge from the sale of certain Marcellus Shale assets as well as the CAD272 million gain from the sale. And it was good enough to cover the company’s monthly dividend of CAD0.18 per share by a solid 1.82-to-1 margin, which works out to a payout ratio of 55 percent.

The company’s debt-to-funds flow ratio came in at just 0.7-to-1. That’s rock-bottom for dividend-paying Canadian energy stocks and a clear sign of management’s success in keeping borrowing down, even as it ramps up light oil development in the Bakken region and shale gas in the Marcellus.

That Enerplus was able to report such robust results despite challenges to production is in parts due to strong pricing and management’s continued focus on costs. Average daily output came in at just 75,383 barrels of oil equivalent per day (boe/d), virtually unchanged from the first quarter of 2011 and lower by 11.2 percent from year-earlier levels, as wet weather interrupted drilling plans. Oil and natural gas liquids output was 7.6 percent lower than in 2010, while gas production fell 13.8 percent.

The good news is field conditions have apparently improved, allowing activity to return to normal levels in July, and the company still expects to exit 2011 with production of 81,000 to 84,000 boe/d. That’s slightly above prior estimates, though management has cut its former projections 2011 average annual output by 2,000 boe/d to a range of 76,000 to 78,000.

Enerplus’ most impressive move on costs was debt reduction, as total obligations were slashed 34.1 percent from year-earlier level. Operating costs were also reduced to CAD9.86 per barrel of oil equivalent (boe) from CAD10.09 a year ago. That figure should improve as production levels ramp up in the second half of 2011 and restore scale.

As for selling prices, the company actually saw an increase for its natural gas output (57 percent of production), as CAD3.86 per thousand cubic foot was 2 percent above the year-earlier quarter’s take. That’s a good sign that the drag of falling gas prices on earnings has run its course.

Crude oil prices, meanwhile, rose 32.3 percent to about USD90 a barrel, and realized selling prices for NGLs surged 39.2 percent. Selling prices for these have been locked in with aggressive hedging, which will protect cash flows from current turbulence.

Capital spending for the quarter came in at CAD145.2 million, up 64.2 percent from year-earlier levels. And the company has adjusted its plans for the rest of the year upward as well to CAD770 million from a prior projection of CAD650 million.

Management continues to focus its efforts on the liquids-rich Deep Basin region in Canada, light oil properties in the Bakken, gas in the Marcellus Shale and “waterflood” assets utilizing a suddenly profitable technology to reach heretofore hard to get at reserves. Some 85 percent of CAPEX is targeted toward these areas, though some of the additional spending is due to expense increases due to weather and higher service costs.

Looking ahead, the combination of conservatively financed production increases, price hedging and cost controls should keep cash flows rising in the second half of the year. The shares have dropped off during the past week on worries about the global economy and, by extension, energy prices and now yield close to 8 percent. That’s set up a nice opportunity for those without positions to buy Enerplus’ New York Stock Exchange-listed shares well below my target of USD33.

Newalta Corp (TSX: NAL, OTC: NWLTF) turned another quarter of robust growth. Second-quarter revenue surged 25 percent. Gross profit rose to 24 percent of revenue from 23 percent a year ago. Cash from operations and funds from operations soared 328 percent and 22 percent, respectively. And cash from operations and funds from operations per share moved up 325 percent and 23 percent, respectively.

The key was continued strong performance of the company’s environmental cleanup and recycling operations, and targeted capital spending to expand those revenues. Growth CAPEX for the second quarter soared 123 percent, laying the groundwork for more of the same going forward. Meanwhile, cash from operations covered growth capital expenditures, maintenance CAPEX and dividend payments combined by a comfortable 1.1-to-1 margin, eliminating the need for outside financing. The payout ratio based on cash from operations is just 12 percent, and 38 percent based on funds from operations.

According to CEO Al Cadotte, management “expects a strong second half of the year with results much improved over last year.” That’s in large part due to solid commodity prices, which has increased industrial and energy industry activity while lifting the prices for the recycled products produced and sold by the company during its cleanup processes.

The facilities division–which basically makes money from others’ use of assets–saw a 24 percent boost in revenue and a 14 percent increase in profit margins over last year’s levels. Meanwhile, the onsite division–which goes to locations owned by others–saw an 11 percent jump in revenue and 51 percent surge in gross profit.

The company is run on a return on capital (ROC) basis, and here management is clearly succeeding. Trailing 12-month ROC came in at 14 percent in the second quarter of 2011, up from 11.6 percent the year earlier. That’s a good sign for the company’s plan to get that number back up to historical levels in the upper teens. Meanwhile, Newalta continues to sign up new business, including the CAD6 million purchase of a 50 percent partnership interest in a water recycling company based in Pennsylvania.

Given heightened concern about drinking water safety in areas where companies are fracking–and the major dollars invested by producers in shale reserves–this has the potential to become a very big business both in the US and Canada. And it’s a nice complement to the company’s other business lines, which range from recycling lead batteries to oil sands cleanup.

This is one company that disproves the “Yellow” rule to always sell a dividend cutter stock. Back in early 2009 Newalta slashed its payout from a monthly rate of CAD0.185 to a quarterly tally of CAD0.05. The immediate result was a cratering stock price, as investors fell over themselves to bail out.

As it turned out, the cut marked the low in the stock, which has since risen more than seven-fold, while management has boosted dividends twice along the way. Looking ahead, there’s certainly room for much bigger gains, as the company continues to grow its business.

The key difference between Newalta and Yellow: Newalta never wavered from its growth strategy. Even during its darkest days, the company was still investing in growth, expanding its environmental cleanup and recycling business, often to new areas like oil sands. That tenacity is now paying off in spades, as the company has now become a major player. Second quarter revenue has now surged decisively above the 2008 peak, and shows every sign of moving much higher going forward.

As long as Newalta sticks to its guns, sooner or later the stock price is going to follow its fortunes higher. In the meantime, those who don’t already own it have a chance to buy at a price of just 86 percent of rapidly growing revenue. Truly one of Canada’s undiscovered gems, Newalta is still a buy up to USD15.

Parkland Fuel Corp (TSX: PKI, OTC: PKIUF) posted a 13 percent jump in fuel volumes in its second quarter 2011 to 903 million litres. That was paced by a 26 percent jump in commercial volumes, and it’s the legacy of recent aggressive growth through acquisitions, which has left the company with unprecedented scale and a platform for future growth.

The second quarter has emerged as one that’s likely to come up seasonally weak, at least relative to the first quarter. This time around, cash flow was flat (up 1.4 percent), not including a CAD3.3 million one-time expense related to management changes and acquisition costs. Per share totals were affected by a CAD86.3 million equity financing to fund purchases and strengthen the balance sheet.

The dividend payout ratio came in at 94 percent of distributable cash flow, versus 85 percent a year ago. The primary reason is basically growing pains and what CEO Bob Espey called “opportunities to improve the integration of our acquisitions and realize additional savings.” That need showed up in the numbers, as revenue surged 58 percent and lifted gross profit by 14 percent, but operating costs rose 25 percent and marketing cost surged 39 percent. Operating costs per liter sold rose 11 percent from year-earlier levels.

That adds up to a lot of work for management going forward. But Parkland was able to trim its interest costs despite the expense of expansion. Long-term debt has been cut dramatically from CAD328.1 million a year ago to just CAD280.7 million. And net of its dividend reinvestment plan, the company’s actual payout ratio was just 33 percent of distributable cash flow in the quarter, enabling the company to boost its cash position by CAD15.6 million.

Parkland’s year-to-date payout ratio is 60 percent, well below the company’s annual target of between 70 and 80 percent. Historically cash flow from the retail division–recently expanded by the purchases of Cango and Save-on-Food–has come in 18 percent in the first quarter, 27 percent in the second, 32 percent in the third and 22 percent in the fourth.

In contrast the commercial side has broken down much more seasonally, as 39 percent in the first quarter, 15 percent in the second, 11 percent in the third and 34 percent in the fourth. That’s because it focuses on higher-margin heating oil and propane in the winter months and lower-margin distillates in the summer.

At this juncture commercial is growing faster than retail, slanting Parkland a little to the winter. But the upshot is the two businesses do balance themselves out to some extent, with retail stronger in the summer months and commercial in the colder part of the year. The large number of acquisitions Parkland has made recently has made that pattern a bit less predictable, and the company’s earnings do depend on refiners’ margins to some extent, which can be volatile. But based on second-quarter numbers it looks like at least some of the overall seasonality in numbers has diminished, which should keep distributable cash flow more level from month to month.

The key challenge for management is going to be getting some of the costs out of the newly acquired businesses that saw higher expenses. The construction of a new fuel storage facility in Alberta slated for mid-2012 completion should help somewhat. And management is looking for further opportunities to expand in “non urban” areas, where competition is less and needs are greater.

The company will also have to replace its fuel supply contract with Suncor Energy Inc (TSX: SU, NYSE: SU), as the latter stated it was ending its deal with the company. Management, however, continues to assure investors that there are plenty of alternatives. In fact, speaking during the second-quarter conference call, CEO Bob Espey stated the company “will likely have less reliance on refiners’ margins going forward, which will take the volatility out of our earnings.”

On the balance sheet side, Parkland has no significant maturities until 2014, when it new credit agreement is up for renewal (Jun. 30) and it has CAD98 million in a convertible bond coming due. Those items combined are basically all of the company’s debt, though borrowings will likely rise if there is another takeover.

As far as dividend growth is concerned, management’s plan has always been to bring down its payout ratio to a level where a boost would be easily absorbed. There’s nothing in these numbers to indicate the company isn’t progressing to that point. Meanwhile, after recent wild market action, the stock is again yielding upwards of 10 percent. The result: Parkland Fuel is again a strong buy up to USD13 for those who don’t already own it.

PHX Energy Services Corp (TSX: PHX, OTC: PHXHF) generated record second-quarter activity in both Canada and the US. Fastest growth, meanwhile, was realized from international operations in Albania, Peru, Russia and Colombia, where it expects to add sales in the third quarter for the first time. Operations outside of North America were 11 percent of overall revenue, up from 7 percent a year ago.

Overall company revenue surged 24 percent for the quarter and is up 36 percent for the first half of 2011. Cash flow from operating activities surged 47 percent, while funds from operations were up 20 percent. Funds from operations per share–the account from which dividends are paid–rose 15.4 percent to CAD0.15. That covered the distribution by a solid 1.25-to-1 margin (an 80 percent payout ratio) for the quarter and by more than 2-to-1 for the first half of the year. Impressively, high levels of activity in North America were achieved despite adverse weather conditions, which delayed some producers’ plans.

The company maintained a healthy level of capital expenditures (CAD11.3 million) during the quarter, while slashing long-term debt by 14 percent since Dec. 31, 2010, and holding shares outstanding at roughly the same level. The company has no near-term debt maturities.

Looking ahead, PHX management expects activity levels will continue to increase, as demand for its signature directional drilling services surges around the world. Management is boosting capital spending for the year by another CAD18.5 million to CAD66.3 million, for the purpose of financing an additional 20 positive pulse measurement while drilling systems (MWDs) and related equipment. That will bring the company’s fleet of guidance systems to 220 worldwide.

Cost reduction has been at the heart of management strategy since the company reported disappointing fourth quarter 2010 results on unexpected expenses. The company has issued guidance that these measures will “improve margins and profitability in upcoming quarters.” Taking delivery of the remaining MWDs ordered this year will also help.

The US now accounts for more than half revenue. That’s down from 57 percent last year, as operations outside North America have grown. But it still means considerable exposure to US dollar revenue. The good news is the company has continued to manage its currency exposure well, evidenced by the relative lack of impact from the Canadian dollar’s recent strength. And activity in the US remains quite robust as shale oil and gas become increasingly important to meeting America’s energy needs.

Aside from concerns about controlling costs, the biggest issue that affects PHX shares on a day-to-day basis is energy prices. And with pessimism rising about the world economy, it’s no great surprise they’ve lost some ground this year. The silver lining is the rock-solid yield is now close to 5 percent, while the numbers indicate a business poised for rapid growth even if the global economy does slow. That’s a strong combination, and it’s why I continue to rate PHX Energy Services a buy up to USD14 for those who don’t already own it.

Vermilion Energy Inc (TSX: VET, OTC: VEMTF) boosted its second-quarter global production of energy by 3 percent sequentially from the first quarter and 11 percent year over year to 35,219 boe/d. That was right on target with management’s guidance this year and reflected new output from operations in the Netherlands and Australia. Management also stuck to full year production guidance of 35,000 to 36,000 boe/d.

Funds from operations surged 17 percent to CAD1.32 per share sequentially from the first quarter. That produced a payout ratio of just 43 percent of funds flow from operations, the account from which dividend are paid, down from last year’s 51 percent. Dividends plus all capital spending, meanwhile, came in at 111 percent of funds from operations, down from 152 percent, though capital spending remained a robust CAD85.1 million for the quarter and CAD241.9 million for the first six months of the year.

The company benefitted from favorable pricing for both liquids and natural gas, a benefit of producing and marketing energy in Europe and Australia, as well as North America. Realized selling prices for natural gas, for example, were up 25.3 percent, even as rivals doing business in only North America saw falling to flat pricing. Oil and natural gas liquids realized a similar benefit, with average realized selling prices soaring 48.6 percent as Brent Crude’s price gap with North American oil moved out to new records.

Vermilion’s production is currently 59 percent crude oil, 4 percent NGLs and 37 percent natural gas. The latter will expand to a much larger piece of the pie when the Corrib field off the Irish coast comes into full production, an event management has stated will likely trigger a dividend increase due to sharply higher cash flows and much lower capital spending levels. The output from Corrib, however, will be sold into European markets, where gas prices are much higher than in North America. As a result, profit margins should remain very high for the company.

Winning final permits for Corrib and its related infrastructure did take longer than initially expected. These are now all in hand, however, and construction on the last phase of the project–and onshore pipeline–will begin in 2012 with completion now targeted for 2014.

Looking ahead, management continues to target 10 percent annual production growth, with gains in the near term driven by light oil output from the Cardium resource play in western Canada and a ramping up of Netherlands production. The company expects to exit 2011 with Cardium volumes of 6,000 boe/d, a figure equal to more than a sixth of its second-quarter output.

It also projects stable production in France, where the national government has elected to ban the use of hydraulic fracturing, or “fracking,” outright. That’s because the company’s conventional oil operations in the country don’t use the technology, though it does employ fracking in other places.

The balance sheet is very strong, with the company facing no significant maturities until two credit tranches come up for renewal in May 2014. That’s despite the company’s full capital spending plan and management’s refusal to cut the dividend, either when the company converted to a corporation or when oil prices fell from more than USD150 to less than USD30 in late 2008.

Some readers have queried why I still recommend this stock, given its strong run-up from early 2009 lows. The answer is there really isn’t any other energy producer stock yielding more than 5 percent with this kind of secure and robust production profile. The stock has now fallen well below my buy target of USD50, including extremely volatile trading on the day it announced second quarter earnings. That spells a solid opportunity for those who haven’t yet owned Vermilion to pick up shares. Vermilion Energy is a buy up to USD50.

Still Ahead

With these companies and the others reviewed in this month’s Feature Article and Dividend Watch List, 17 Canadian Edge Portfolio Holdings have now reported their second-quarter results. That leaves 19 still left to come in with numbers. I’ve listed them below, along with estimated and confirmed reporting dates.

The generally favorable numbers we’ve seen from the companies reporting thus far do indeed portend well for the rest. We won’t know for certain, however, until the actual results are posted.

According to estimated and confirmed reporting dates, all of my CE Portfolio companies except newcomer Student Transportation should have turned in their numbers by Friday, Aug. 12. Assuming those reporting dates hold, my plan is to publish analysis for all of them in an extensive Flash Alert on Aug. 15.

The exceptions would be if there were developments that warrant taking action on specific holdings before then. In that case, I will send out a brief Flash Alert sometime next week, with expanded analysis in the Aug. 15 Flash Alert.

Conservative Holdings

• Artis REIT (TSX: AX, OTC: ARESF)–Aug. 10 (confirmed)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Aug. 12 (confirmed)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Aug. 14 (estimate)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Aug. 9 (confirmed)
• Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF)–Aug. 12 (confirmed)
• Cineplex Galaxy Inc (TSX: CGX, OTC: CPXGF)–Aug. 11 (confirmed)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Aug. 9 (confirmed)
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)–Aug. 9 (confirmed)
• IBI Group Inc (TSX: IBG, OTC: IBIGF)–Aug. 12 (confirmed)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Aug. 10 (confirmed)
• Just Energy Group Inc (TSX: JE, OTC: JSTEF)–Aug. 11 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Aug. 9 (confirmed)

Aggressive Holdings

• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Aug. 12 (confirmed)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Aug. 8 (confirmed)
• Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–Aug. 10 (confirmed)
• Perpetual Energy Inc (TSX: PMT, OTC: PMGYF)–Aug. 10 (estimate)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Aug. 11 (estimate)
• Provident Energy Ltd (TSX: PVE, NYSE: PVX)–Aug. 10 (confirmed)
• Student Transportation Inc (TSX: STB, OTC: STUXF)–Sept. 23 (estimate)