Once again, I’m featuring a current Canadian Edge Portfolio recommendation and a new addition as my two Best Buys this month. Both offer monthly dividends paying at annualized rates of 7 percent to 8 percent, with a history of increases as their businesses have grown.

The newcomer is Wajax Corp (TSX: WJX, OTC: WJXFF), a Toronto-based distributor of mobile equipment, power systems and industrial components for a wide range of Canadian industries.

Mobile equipment accounted for about 55 percent of second-quarter revenue and roughly the same portion of earnings. Power systems were 21 percent of sales and 23 percent of earnings, while industrial components were 24 percent and 22 percent, respectively.

The company has operations across Canada, though the energy sector in the western part of the country has recently driven growth.

Equipment sales in the second quarter, for example, rose 29 percent, as demand was heavy in the construction and mining sectors. That was partly offset by lower sales of power systems to Western Canada’s oil and gas sector.

The bottom line was a 12 percent boost in quarterly earnings, fueled by 16 percent higher revenue. That was good enough to cover Wajax’ monthly dividend comfortably with a 73 percent payout ratio, backing up the 35 percent dividend increase announced back in March.

Investors, however, have seemed to focus on a couple of items portending weakness, or at least slower dividend growth for Wajax next year. Item one was a 5 percent drop in consolidated backlog across all three divisions. Management attributed that to lower bookings for power systems in the oil and gas and power generation industries as well as  speeded up deliveries for construction equipment.

Wajax isn’t a commodity producer, so its earnings aren’t directly impacted by changes in oil and gas prices. Demand for equipment, however, is affected by the health of its customers. And when conditions are challenging in electric power generation or energy, companies will pull back spending and what they order from Wajax.

During the company’s second-quarter conference call CEO Mark Foote and CFO John Hamilton stressed they expect the oil and gas business to be “a challenge for us through the next couple quarters.” The main impact so far has been on equipment orders rather than for replacement parts and service.

But management is looking for “some decrease in our margins,” though that will be mitigated at least partly by an expected upturn in power generation sales in Ontario.

The company also plans to build on its success in Quebec by entering the equipment rental market in Ontario, though a decision on rollout timing will come only later this year. Geographic and sales diversification is a key strength of this company and a big reason why management can pay out a large share of earnings comfortably as dividends.

The outlook for the second half is cautious, which is no doubt another reason for recent selling of the stock. But renewed attention to costs and conservative financing–there’s no debt due until 2016–should keep the dividend secure. Management also stated during the call that it doesn’t “see anything in our foreseeable future now that would suggest the necessity to change the dividend,” including any prospective “major investment.”

In fact, any acquisition or other expansion of the company’s footprint in its key operating areas has historically resulted in dividend increases.

Since Wajax converted to a corporation in January 2011, the dividend has been raised from CAD0.15 to CAD0.18 to CAD0.20 and finally to CAD0.27 starting with the Apr. 20, 2012, payment.

Management may hesitate to lift the payout again until it either expands with an acquisition or demand improves in the oil and gas and power sectors. But “higher” is definitely the trend. And a rising payout will push Wajax shares up right along with it.

The most exciting thing about EnerCare this year has been the proxy battle between management and private capital firm Octavian Advisors LP.

Octavian put up four of its nominees for the company’s board of directors, who then ran against eight picked by management at the Apr. 30 annual meeting.

In the end management won the day, but only by the slimmest of margins at 55 percent to 45 percent.

Since then Octavian has raised its stake to 13.79 percent of the company, while it continues to demand that management pursue “constructive dialog” over EnerCare’s future.

To date management isn’t budging. But given the size of its investment and recent purchases, it isn’t likely Octavian is going away either.

I see two possibilities. First, management continues to steadily build revenue and cash flows for EnerCare and to pass the gains along in the form of modest dividend increases. The company has raised its monthly payout twice this year, first from CAD0.054 to CAD0.055 in January and then to CAD0.056 in April.

EnerCare’s second-quarter headline earnings swung to a loss of CAD3 million due to accounting for a change in future Ontario tax rates. The company’s structure and business lines, however, allow it to pay dividends from cash flow, making conventional earnings an irrelevant measure of real profit.

The current distribution was covered very comfortably by second-quarter distributable cash flow, as overall revenue rose 5 percent. The submetering business led the way with a 25 percent sales boost, as building owners continue to adopt the service as a way to save on energy costs.

Cash flow dipped about 2 percent during the quarter, in part due to a higher attrition rate in the waterheater rentals business. The company did note, however, a drop in “competitor-related attrition.”

And it moved ahead with efficiency measures to cut costs, such as deploying a new customer billing system consolidating all functions of the sub-metering business. Debt interest costs were slashed 6.6 percent from the start of 2012, by paying off and refinancing higher cost debt.

During the company’s second-quarter conference call CEO John MacDonald issued a generally bullish outlook for both lines of the business, citing the strong growth of submetering to date and the odds of it continuing in the second half of 2012.

He also noted the company’s broadening product mix and geographic expansion opportunities, with a goal of building long-term customer relationships as well as expectations attrition rates in waterheater rentals would continue to decline.

This week EnerCare announced new submetering contracts from two leading owners of apartment complexes in Ontario, adding some 4,500 rental suites to its customer base. This business operates mostly under a flat-dollar-margin basis, with changes in commodity prices basically flowing through and not affecting the bottom line.

As a result it’s almost a fee-for-service arrangement, with very stable returns. The more it grows, the more EnerCare’s cash flows grow and the more likely we’ll see further dividend growth down the road that will power the shares higher.

The other possibility for EnerCare is Octavian manages to wrest management control. Whether it succeeds or not will likely depend on how successful EnerCare management is growing the company’s cash flows and distributions.

The decision is in shareholders’ hands, as they’ll continue to vote on directors. My view the last time around was that investors who want to own the company for long-term dividends and gradual appreciation should stick with management. That’s still my view, though there is a very real road to windfall profits if Octavian wins.

Mainly, the firm has frequently cited the 2007 takeover of the former UE Waterheater Income Fund as a model for what should happen to EnerCare. If Octavian should succeed in taking over, we can probably expect to see a takeover–most likely at a very generous premium to the stock’s current price.

Either way this is an undervalued company that looks set to reward investors either slowly or very quickly.

What can go wrong at Wajax and EnerCare? Should the Canadian economy drop into recession, both companies would likely take hits to earnings.

The direct damage to EnerCare would be less, as most of its revenues come from its fee-for-service operations.

But it could still see higher attrition rates for waterheater rentals and a lessened ability to pass through rate increases as it did this year.

Arguably, however, interest in submetering deployment will keep expanding, as it’s driven by owners’ desire to cut their energy costs.

EnerCare held its distribution steady through the 2008-09 downturn. It did cut its payout in September 2009.

But the primary reason had little to do with the economy, which was by then on the mend.

Rather, it was Ontario regulators’ decision to suspend the company’s submetering expansion in the province until further study. That triggered a temporary revenue shortfall relative to the increased debt that had funded the growth of the submetering operation.

The province has since passed clear rules for submetering. Meanwhile, other regulations restricting EnerCare’s waterheater business have also expired. The result is the company is now operating under favorable rules for both of its key businesses.

Probably the biggest thing that could go wrong at this point would be deterioration in those relations that once again impeded EnerCare’s ability to earn a fair return. There have been periodic legal squabbles, the latest a flap this summer over alleged spying by the company on a rival’s door-to-door sales strategy in Ontario.

Unfortunately, this seems to be part of the cost of doing business. The good news is nothing appears to be a major risk at this point. I’ll continue to watch developments in this area as long as EnerCare is a Conservative Holding. But barring something a lot worse than what we’ve seen, EnerCare is a buy up to USD10 for anyone who doesn’t already own it.

The other issue is what would happen if Octavian should really walk away, i.e., dump all of its stock on the market at the same time and thereby drive down EnerCare’s share price in the near term. That would seem highly unlikely, as Octavian would be among the worst hurt by such a move. And the stock would bounce back so long as the company continued to grow.

But takeover battles are rife with uncertainty for outsiders. And that means investors need to be ready for volatility when such wars are in progress.

The economy is a much bigger factor for Wajax, which is why it’s a new Aggressive Holding rather than a Conservative Holding. The proof is in the company’s dividend history.

Back in 2004 Wajax paid a quarterly dividend of CAD0.04 a share. It raised that to CAD0.07 the following spring and then to a monthly rate of CAD0.1833 when it converted to an income trust later that year.

The monthly rate then jumped to CAD0.21 in December 2005, to CAD0.23 in February 2006, to CAD0.25 in June, CAD0.30 in September, CAD0.32 in December, CAD0.33 in September 2007, CAD0.34 in June 2008, CAD0.35 in September 2008 and finally peaked with a jump to CAD0.36 in October.

The payout held at that level throughout the 2008 meltdown but by February 2009 it was clear sales had dropped in the recession enough to cut the payout.

Management slashed to CAD0.20 with the April 2009 payment and again to CAD0.15 in September of that year. That level held until June 2011, at which time the company began raising again.

Does the current slowdown in sales growth portend another drop in dividends for Wajax? That’s obviously what’s on at least some investors’ minds now, and the result is the stock has dropped from a high of USD52 plus in mid-August to less than USD44 this week.

By way of comparison, Wajax stock traded in the mid-30s in 2008 up until October and then crashed all the way to USD10 by early 2009.

The company has grown considerably since, which would probably limit downside.

But investors should be aware that this is a growing company but nonetheless a cyclical stock that would not do well in a reprise of 2008.

Why add this stock now? The main reason is I don’t believe we’re headed for a repeat of 2008-09.

And barring that, what we have is a stock that’s come well off its highs despite continuing to post impressive numbers and dividend growth.

It may well dip a bit lower, should Canadian growth slow meaningfully in the second half of the year.

But so long as management continues to grow the franchise, any such setbacks will be temporary.

And a growing business attached to a yield of roughly 7.5 percent is rarity in any market.

I’ve rated Wajax a buy in How They Rate off and on since I started covering it in 2006. Before this selloff my view was the stock had been caught up in buying momentum and was too expensive.

This drop brings it back below my target of USD45, and I’m adding it to the Aggressive Holdings as a buy up to or below that price.

For more information on EnerCare, go to How They Rate under Financial Services. Look under Business Trusts, the very next section down, for Wajax. Click on their US symbols to see all previous writeups in Canadian Edge and Maple Leaf Memo.

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. Click on their names to go directly to company websites.

Both of these companies are in the small to mid-cap category. Wajax’ market capitalization is about CAD730 million, while EnerCare’s is CAD500 million. There is, however, plenty of liquidity on both sides of the border, which for both companies is with over-the-counter (OTC) symbols in the US.

EnerCare is covered by six research houses (four “buys,” two “hold” recommendations) and Wajax is tracked by 10 houses (four “buys,” five “holds” and one “sell”). That means there’s also plenty of visibility for both companies.

As is the case with all stocks in the Canadian Edge coverage universe, you get the same ownership whether you buy in the US or Canada. These stocks are priced in and pay dividends in Canadian dollars. Appreciation in the loonie will raise dividends as well as the value of your shares.

Dividends of both companies are 100 percent qualified for US income tax purposes. Both are former income trusts that converted to corporations on Jan. 1, 2011. Neither cut its dividend when it made the jump, though Wajax ended its previous policy of making “special cash” distributions.

Canadian investors enjoy favorable tax status for both companies, as they do for all Canadian corporations. For US investors dividends paid by either company into a US IRAs aren’t subject to 15 percent Canadian withholding tax, though they are withheld at a 15 percent rate if held outside of an IRA.

Dividend taxes withheld from US non-IRA accounts can be recovered as a credit by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation.