Editor’s Note: In Brief is the executive summary of the May 2012 issue of Canadian Edge. Please use it as a guide to reading the issue. — RSC

Rarely in market history have so many investors been so afraid of losing so much, particularly after three years of solid if not outsized stock market returns. That’s a powerful statement of just how devastating the crash of 2008 was and the legacy of worry it has left behind.

The “solution” more than a few income investors have adopted is basically momentum investing. That is buying and holding dividend-paying stocks only so long as they’re rising, and getting rid of anything that seems to be heading in the other direction.

Momentum investing is what the big institutions that dominate daily trading must do. Fund managers evaluated on a quarterly or at most an annual basis simply can’t afford to take the chance of a big loser.

Exchange-traded funds (ETF), meanwhile, can dramatically affect performance of individual stocks as a sector’s popularity waxes and wanes, and are major contributors to today’s high stock market volatility.

Unfortunately, momentum investing always ensures you buy dear and sell cheap. Consequently, it’s the worst possible way to economically collect dividends and to safely and reliably build wealth.

For one thing, frequent trading of dividend-paying stocks means you’ll be taxed at a higher rate on what you receive. And you’ll pay more in commissions and fees. The latter are routinely assessed US investors by some brokers for trading Canadian stocks. Frequent dividend-stock traders also don’t capture the capital appreciation that accompanies a rising payout over time.

Of course, frequent trading can be quite soothing emotionally. And with so many people adopting it Canadian Edge Portfolio stocks now are basically divided between those that have been bid up well above bargain levels–my buy targets–and those selling well below.

The first group seems to continue to move further above my buy targets. The second group appears to slide in equal measure, convincing more investors that where there’s smoke there’s fire, i.e. risk to dividends. This spurs more selling and leads to lower prices.

To be sure, some companies do face real risks in early 2012. Canada is probably in the best shape of any developed nation, with a growing economy, sound banking system and steady government that’s closing in on fiscal balance. But not every company or sector is on solid ground.

Take, for example, the losers from this year’s crash in natural gas prices, or any highly indebted company. Not every stock on the Dividend Watch List will wind up reducing its payout. But at least one company in the How They Rate universe has cut its dividend in almost every month since Canadian Edge’s debut back in July 2004.

Complacency is not an option. Neither, however, is getting emotional about a stock’s daily or even weekly moves. All too often this year I’ve answered queries from readers convinced my buy target will never be revisited, or that a company’s dividend is really at risk just because the stock has backed off a recent high, even if all the recent news and numbers are positive.

I suspect many have gone on to pay through the nose for a favored Canadian Edge stock, before it rolled back much of its gains. And even more have sold recommended companies at terrible prices, only to watch them rebound. It’s hard not to be tempted to jump aboard a bandwagon. And being there when a company really does blow up is truly not something anyone wants to repeat.

On the other hand, that’s why we diversify and balance portfolios and eschew potentially emotional tactics like averaging down and setting stop-losses. Not every stock is going to work out, and volatility comes with the territory.

But diversification and balance prevent a bad bet from taking down your entire portfolio. And this knowledge is invaluable when it comes to having patience with underperforming stocks, where all the evidence indicates the underlying business is healthy and growing.

Looking over the current Canadian Edge Portfolio, I’m as convinced as ever our lineup is the right one, focused on the best values of well-run businesses drawn from a broad range of sectors. Over the next month this faith will be put to the test, as our recommended companies release first-quarter numbers and management comments on progress and future guidance.

The first three to report were highlighted in an Apr. 26 Flash Alert. In this issue I focus on six more that have reported since then; the rest I’ll review in Flash Alerts over the next few weeks.

My approach is to stick with companies so long as they remain healthy and growing as businesses and to swap for something else if that changes. The nine companies reporting so far did measure up. We won’t know about the rest until they present their numbers. But until then we can rest assured we’re diversified enough to weather whatever comes at us.

That’s the key to getting the most out of your Canadian stocks here in spring 2012, just as it is every year.

Portfolio Action

I’m not making any changes to the Canadian Edge Portfolio this month.

First of all, I make moves based on the numbers, and all nine of the companies to report first-quarter results so far have measured up.

Second, despite the volatility in some of the individual stocks there’s nothing that’s happened since the April issue to suggest any critical weakness in the companies yet to report. Nor is any such bad news likely to break before earnings are actually announced.

To be sure, the massive drop in natural gas prices poses a problem for some. Last month, however, I again reduced exposure to companies being hurt by falling gas. I do still hold some gas-focused producers such as Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF). But Peyto and its like have the strength to weather even a drop to USD1 gas prices, and their stocks are about as cheap as they’re likely to get.

Equally, Spain’s recession and the weak condition of other European economies are problems for some Canadian companies. None of our Canadian Edge Portfolio companies have that kind of exposure, not even those that do business on the Continent, including Vermilion Energy Inc (TSX: VET, OTC: VEMTF). Our companies even have the antidote for softer-than-expected growth in Asia, mainly strong balance sheets, conservative operating policies and growing operations in the US that are already paying off this year.

I still rate Aggressive Holdings Colabor Group Inc (TSX: GCL, OTC: COLFF), Extendicare REIT (TSX: EXE-U, OTC: EXETF) and Peyto Exploration holds, and very likely will continue to do so the first half of 2012. But the rest in both the Conservative and Aggressive segments are bargains up to stated buy targets shown in the Portfolio tables.

Here’s when Canadian Edge Portfolio Holdings have reported or will report earnings. Those yet to specify a date are indicated as “estimated,” with dates shown based on prior reporting periods.I’ve linked to articles where released numbers have been analyzed, including to the six Holdings reviewed in this month’s Portfolio Update.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Apr. 26 Flash Alert
• Artis REIT (TSX: AX-U, OTC: ARESF)–May 9 (confirmed)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–May 7 (confirmed)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Jun. 1 (estimate)
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPUF)–May 7 (tentative)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–May 9 (confirmed)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–May 10 (confirmed)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–May 8 (confirmed)
• Dundee REIT (TSX: D-U, OTC: DRETF)–May 4 (confirmed)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–May 9 (estimate)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–May 11 (confirmed)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–May 14 (confirmed)
• Just Energy Group Inc (TSX: JE, OTC: JUSTF)–May 18 (estimate)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–May 8 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–May 9 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–May 4 (confirmed)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–May Portfolio Update
• Shaw Communications Inc (TSX: SJR/B, NYSE: SJR)–Apr. 26 Flash Alert
• Student Transportation Inc (TSX: STB, OTC: STUXF)–May 11 (estimate)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–Apr. 26 Flash Alert

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–May High Yield of the Month
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–May 11 (confirmed)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–May Portfolio Update
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–May 9 (confirmed)
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–May Portfolio Update
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–May 11 (estimate)
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)–May 8 (confirmed)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–May 8 (confirmed)
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–Jun. 14 (estimate)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–May 8 (confirmed)
• Pengrowth Energy Corp (TSX: PGF, NYSE: PGH)–May Portfolio Update
• PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–May Portfolio Update
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–May 11 (estimate)
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–May Portfolio Update
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–May 7 (estimate)

High Yield of the Month

High Yield of the Month features the two best buys for May. If you’re starting a portfolio, buying HYotMs each month is one good strategy, provided the picks meet your own risk-reward preferences.

This month’s choices are Conservative Holding Keyera Corp (TSX: KEY, OTC: KEYUF) and Aggressive Holding Acadian Timber Corp (TSX: ADN, OTC: ACAZF).

Keyera is a first-rate owner and operator of mostly natural gas liquids (NGL) infrastructure assets. The stock ran up to new heights well above my buy target in late 2011. Now it’s back to a bargain range, as momentum investors have given up on it.

But the underlying business has undimmed prospects for cash flow and distribution growth. Now is the time to buy Keyera up to my target of USD42 if you haven’t yet.

Acadian’s results, including recently released first-quarter numbers, continue to be affected by a series of short-term factors. But the company’s rich timber reserves and solid financial position–backed by parent Brookfield Asset Management (TSX: BAM/A, NYSE: BAM)–provide sound backing for the dividend, and it’s well positioned for growth as the US housing market revives. Buy Acadian Timber up to USD13 if you haven’t yet.

Feature Article

A cooler spring has pushed natural gas prices back above USD2 per million British thermal units in the US. Alberta gas for June delivery, however, is still under USD1.70. And some in the industry are gearing up for sub-USD1 prices this summer.

Almost every producer can make money at USD6 gas. Fewer do so at USD3 to USD4, almost none at less than USD2. That’s why gas’ drop this year from over USD4 to less than USD2 is so devastating to many in the industry. Worse, the damage is only beginning to be felt by the most affected companies, which hail from a wide range of industries. Conversely, there are also many companies that are set to reap great benefits, also over a range of industries.

This month’s Feature Article highlights winners and losers across the spectrum, from producers and energy services firms to pipelines and power generators.

Canadian Currents

We’re providing another look-in on what’s going on at CE’s sister letter, Australian Edge.

This month, via the April AE In Focus, we’re digging into the health care system Down Under and finding several high-quality dividend-payers tied to the domestic market as well as to long-term international trends.

Tips on Trusts

This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide.

Dividend Watch List—Only one Canadian Edge How They Rate company cut its dividend last month, Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF). The company reduced its payout for the second consecutive quarter, as lower pulp prices globally and the stronger Canadian dollar cut distributable cash flow to just CAD0.18 per share.

Management also stated with the earnings release that it expected global pulp prices to continue improving. Even after the distribution cut, however, the payout ratio based on first-quarter results is still a lofty 122.2 percent. That’s high enough to keep Canfor on the Dividend Watch List. So is the fact that dividends have ranged from a high of CAD0.25 per share per month to as little as a penny a month over the past three years alone.

The company is now the sole owner of the limited partnership that provides essentially all of its income. It’s also now 50.2 percent owned by Canadian Forest Products. That’s a stake the latter is unlikely to unload, given it had been earning substantial cash flows through the partnership. Also, the company is approaching the end of its capital cycle, with substantially less spending planned after this year.

That’s a plus for the dividend. But at the end of the day, what Canfor can pay will be determined by pulp prices and how they compare with the raw forest products it needs to run its mills. Responding to a question during the conference call about when investors could expect a CAD0.40 per share per quarter dividend again, CEO Joe Nemeth stated, “We would likely see the dividend move up and down” as “the pulp market rises and falls over a cycle.”

At this point it looks like the cycle may be close to the bottom for pulp prices, particularly in China. That’s enough reason for patient and aggressive investors to hang onto the stock. But this is not a conservative stock, and it continues to belong on the Watch List. Hold.

Here’s the rest of the Watch List.  Note the list now reflects fourth-quarter and full-year 2011 results but only a handful of first-quarter 2012 results. Look for more changes next month.

Aston Hill Income Fund’s (TSX: VIP-U, OTC: BVPIF) premium to net asset value has become a discount. But the closed-end fund’s yield is still well above the average yield of its holdings, indicating a lot of leverage is being used. Sell.

Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF) management has yet to reveal what it considers a “sustainable” dividend rate, which is dependent on an agreement being reached for the Cardinal power plant.

The next obvious opportunity for management to announce a decision is May 15, when it releases first-quarter 2012 earnings and holds its conference call.

My best guess is still a dividend cut to a monthly rate of CAD0.035, which would make the stock a decent value for speculators at a price less than USD4. But a dividend cut looks nearly certain. Hold.

Chorus Aviation Inc’s (TSX: CHR/B, OTC: CHRVF) loss of its relationship with Thomas Cook is a very worrisome sign, particularly with contract arbitration continuing with cash-strapped Air Canada Inc (TSX: AC/A, OTC: AIDIF). A decent settlement of this case would preserve at least most of the dividend.

At this point, however, trying to forecast any level is purely speculative. High oil prices aren’t helping either. Sell.

Colabor Group Inc (TSX: GCL, OTC: COLFF) cut its last dividend, but with so much competition and cost pressures another reduction can’t be ruled out.

The company is still executing on its growth-through-acquisitions strategy and looks cheap at this price. But until we see more numbers, we need to assume there is still risk. Hold.

Data Group Inc (TSX: DGI, OTC: DGPIF) will release another set of earnings number on or about May 14. Fourth-quarter results were encouraging, and another solid quarter would go a long way toward quelling worries about future dividends.

But this is still fundamentally a company trying to adapt its business to the Internet. Some have succeeded, but others have failed spectacularly. Hold.

Enerplus Corp’s (TSX: ERF, NYSE: ERF) latest news is it was able to issue USD405 million in debt via a private placement plan. Interest rates were modest, with the 12-year debt issued with a coupon yield of 4.4 percent. That debt will be paid off in five equal installments beginning in 2020.

The real risk here is that the company hasn’t hedged its natural gas production this year, even as it ramps up capital spending to increase its output of oil and natural gas liquids. That’s increased its debt load substantially and therefore risk to the dividend as well. Earnings released on or about May 14 will be instructive. Sell.

EnerVest Energy & Oil Sands Trust (TSX: EOS, OTC: EOSOF) is still paying out a dividend many times what its holdings do, and the yield is quite low in any case. Sell.

Extendicare REIT (TSX: EXE-U, OTC: EXETF) management still maintains it will hold its dividend, and the last time the company released numbers there were several signs of real progress on the cost-cutting front.

Still, the payout ratio was quite high in the fourth quarter, and the situation in the US remains muddled. Hold.

FP Newspapers Inc’s (TSX: FP, OTC: FPNUF) primary risk, as is clearly reflected in the stock price and 13 percent-plus yield, is that the traditional business will fall about faster than the company can find ways to make money on the web.

The jury is still out on this one. Sell.

GMP Capital Inc (TSX: GMP, GMPXF) now has a new chairman, and its purchase of a New York bond trader is paying off across the board, including with the mergers and acquisitions business.

But until the payout ratio comes down a lot, the dividend will be at risk. Hold.

New Flyer Industries Inc’s (TSX: NFI, OTC: NFYED) planned dividend cut of at least 50 percent is still arguably not fully reflected in the bus manufacturer’s share price. And the business is hardly in the pink of health, with cash-strapped municipalities and others unable to place orders. Sell.

Precious Metals & Mining Trust (TSX: MMP-U, OTC: PMMTF) could see some serious upside when mining stocks do recover. But this closed-end fund, selling for a premium of more than 20 percent to net asset value, is trading on its yield, which is being funded from capital as there is very little dividend income or capital gains generated.

A serious cut could send the fund much lower in a hurry, as heedless income investors bail out in panic. That may not happen, but it is a risk not worth taking now. Sell.

Ten Peaks Coffee Company Inc (TSX: TPK, OTCL SWSSF), a serial dividend cutter, faces significant difficulties because of the strong Canadian dollar heading into the second half of 2012.

Another cut would almost certainly knock the company’s share price down as well. Sell.

Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF) is again yielding well over 9 percent as the threat of another dividend cut grows.

Only numbers released this month will give us a real indication of whether the company is controlling costs, executing drilling plans and dealing with a big drop in natural gas prices. Sell.

Bay Street Beat–Here’s how Bay Street reacted to the initial wave of Canadian Edge Portfolio Holdings’ earnings announcements.

Tips on DRIPs—Reinvest your dividends paid by New York Stock Exchange-listed Canadian companies–in some cases at a discount and without paying commissions.

How They Rate

CE Safety Ratings are based on six operating and financial criteria. Companies meeting all six criteria are rated my highest rating of “6.” “0” is the lowest rating, indicating companies that meet no safety criteria. Safety criteria are described in the text below the How They Rate table and are as follows:

• One point if Payout ratio meets “very safe” criteria for the sector.
• One point if Payout ratio has longer-term visibility.
• One point if Debt-to-Assets ratio meets “very safe” criteria for the sector.
• One point if the company’s debt maturing before Jan. 1, 2013, is less than 10 percent of its market capitalization.
• One point if the company’s primary business is recession-resistant. Qualifying varies from company to company, though virtually all Electric Power and Energy Infrastructure companies qualify, while no Energy Services companies do.
• One point if the company has not cut its distribution over the preceding five years.

I list trusts and high-yielding corporations by the following sectors:

• Oil and Gas–All energy producers are included here.
• Electric Power–Power generators.
• Gas/Propane–Distributors from propane to packaged ice.
• Business Trusts–A range of businesses involved principally with consumers.
• REITs–All qualified real estate investment trusts.
• Trust Mutual Funds–Closed-end funds holding portfolios of individual trusts.
• Natural Resources–Trusts and corporations that produce resources and raw materials other than oil and gas.
• Energy Services–Trusts and corporations whose main business is providing drilling, environmental or other services to energy producers.
• Energy Infrastructure–Trusts and corporations that own primarily pipelines, processing facilities and other fee-generating assets.
• Information Technology–Trusts and corporations that provide communications, newspaper, directory and other information services.
• Financial Services–Canada’s banks, investment houses and other trusts and corporations feeding that business.
• Food and Hospitality–Trusts and corporations that franchise restaurants, own and operate hotels and manufacture and distribute food and beverages.
• Health Care–Trusts and corporations involved in the medical care and/or supply business.
• Transports–These trusts and corporations ship freight and move passengers by bus, truck, rail or air.

Coverage Changes

I no longer track FutureMed Healthcare Products Corp, which has de-listed from the Toronto Stock Exchange (TSX) and is no longer trading on the US over-the-counter (OTC) market.. Those who didn’t sell ahead of time per my recommendation should by now have received CAD8.16 per unit in cash.

Provident Energy Ltd has also been dropped from coverage, as it too has de-listed from the TSX and no longer trades on the US OTC market. It’s now a part of Pembina Pipeline Corp (TSX: PPL, NYSE: PBA). Provident shareholders should now have 0.425 shares of Pembina per former share of Provident.

There are no tax consequences for Provident holders from the merger, as it’s an all-stock deal. FutureMed is an all-cash deal, so there will be taxes owed.

Advice Changes

Here are advice changes for this month. See How They Rate for changes to buy targets and other data.

Note data in How They Rate and the Oil & Gas Reserve Life Table now reflect fourth-quarter and full-year numbers. Only a handful of companies, however, have reported first-quarter 2012 numbers. As a result, there are relatively few advice or ratings changes this month. Expect more next month when all the numbers are in.

Bonavista Energy Corp (TSX: BNP, OTC: BNPUF)–To Buy @ 18 from Hold. The shares have pulled back, and 80 percent of revenue is now from liquids production. The effective payout ratio after dividend reinvestment is only 28 percent.

Canadian National Railway (TSX: CNR, NYSE: CNI)–To Hold from Buy @ 75. First-quarter earnings per share were up 31 percent excluding one-time items, but the stock has surged more than USD10 past my buy target of USD75.

Chorus Aviation Inc (TSX: CHR/B, OTC: CHRVF)–To SELL from Hold. Thomas Cook has abandoned a multi-year contract with Chorus to tighten its bond with WestJet Airlines Ltd (TSX: WJA, OTC: WJAFF). That leaves the company entirely dependent on its contract with Air Canada Inc (TSX: AC/A, OTC: AIDIF), which is likely to be substantially revised to Chorus’ detriment. The stock looks cheap but risk is still growing.

Norbord Inc (TSX: NBD, OTC: NBDFF)–To Hold from SELL. First-quarter 2012 cash flow doubled fourth-quarter 2011 levels, as a surge in North American cash flow and sequential gains in European sales demonstrated improved conditions and that management is holding market share.

Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–To Hold from SELL. The share price has pulled back, and new management appears to be getting a handle on costs.

Ratings Changes

Here are changes in Canadian Edge Safety Ratings, reflecting fourth-quarter 2011 earnings results, debt maturities for 2012 and 2013, and recent weakness in energy prices. Only a handful of companies, however, have reported first-quarter 2012 numbers. As a result, there are relatively few advice or ratings changes this month. Expect more next month when all the numbers are in.

ARC Resources Ltd (TSX: ARX, OTC: AETUF)–To 3 from 4. Management affirmed the dividend last month, citing liquids’ 75 percent output and the fact that 70 percent of gas output for 2012 is hedged at prices better than CAD3 per million British thermal units. But with gas in danger of breaking CAD1 in Alberta, profit visibility is less than it’s been in the past.

Chorus Aviation Inc (TSX: CHR/B, OTC: CHRVF)–To 0 from 2. The loss of the Thomas Cook contract essentially to WestJet Airlines Ltd (TSX: WJA, OTC: WJAFF) is a bad sign with Air Canada Inc (TSX AC/A, OTC: AIDIF) still trying to break its cost-sharing agreement, and it eliminates any visibility on future revenues.

Perpetual Energy Inc (TSX: PMT, OTC: PMGYF)–To 0 from 1. The company’s debt is now trading at distressed prices. That effectively cuts off its access to credit as falling gas price pummel cash flows. The company has sold some “non-core” assets, including gas storage operations, but bankruptcy looks increasingly likely.

More Information

How They Rate has automatically updated US dollar unit/share prices, dividend payment rates in US dollars, yields, most recent dividend dates, dividend frequency and debt-to-capital ratios. Note that our quote service sometimes includes special annual distributions along with the regular monthly payments.

How They Rate also includes several free links. Clicking on the Toronto Stock Exchange (TSX) symbol will now take you directly to the Google Finance page for every company in the How They Rate coverage universe.

Clicking on the US symbol of a company takes you to a chronological listing of every Canadian Edge and CE Weekly article in which that trust has been featured. You can also use that page to access articles on other trusts by typing in the relevant exchange and symbol in the “Search Query” box at the top of the page.

For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on dividend paying equities. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission.

The Toronto Globe & Mail features the “Globe Investor” section with all the latest news. Dominion Bond Rating Service is the pre-eminent credit rater in Canada.

The Bank of Canada has a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.

How They Rate can now be accessed several places on the Home Page. The Income Trust Tax Guide has backup to file distributions as “qualified dividends.”

Roger Conrad
Editor, Canadian Edge