No dividend is worth beans without a growing business behind it. The time-tested corollary to that is a seemingly low current dividend paid by a strong trust will usually mushroom, driving the share price higher with it. Conversely, a high yield that proves unsustainable will trigger huge capital losses for its unfortunate owners.

Fortunately, that’s not something unitholders of February High Yields of the Month Ag Growth Income Fund (TSX: AFN-U, OTC: AGGRF) and Trinidad Energy Services Income Trust (TSX: TDG-U, OTC: TDGNF) need worry about. Both have current yields at the lower end of those in the Canadian Edge universe. But both Aggressive Portfolio holdings are set for rapid growth that will drive distributions and share prices much higher in the next three to five years.

That adds up to far higher total returns than most trusts boasting current yields even two to three times as high. Note that Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)—somewhat slower growing but currently yielding more than 10 percent—is my Conservative Portfolio best buy of the month and is reviewed in the Portfolio section.

With the majority of its drilling rigs in the US and its involvement in deep drilling, Trinidad’s results have thus far remained steady amid the depression gripping the Canadian energy services sector. Its ability to take advantage of rivals’ weakness, however, has been severely limited by restrictions on trust new share issues since Halloween 2006 and rising borrowing costs amid the global credit crunch.

As I reported in the Jan. 10 flash alert, Transforming Deals, management took decisive action last month to improve its flexibility: converting from an income trust to a dividend-paying corporation pending approval from Canadian regulators, as well as unitholders in a vote scheduled for March 10, 2008.

The biggest single item for shareholders concerns the distribution, which management is cutting roughly in half. As third quarter results clearly demonstrated, Trinidad was having no problems paying at its prior rate and almost surely would have been able to maintain that amount throughout 2008 until energy services industry conditions inevitably turned up.

Unfortunately, the trust’s 60 to 65 percent payout ratio left only 35 to 40 percent of cash flow to plough back into the business. That’s not nearly enough for the kind of expansion envisioned by management to take advantage of the current weak environment.

As a corporation, Trinidad will now be freed of the constraints on share growth currently imposed on trusts. It will be able to plough back 60 to 65 percent of cash flow into its business to either finance capital spending or control debt growth. That should fire up growth, even as the trust continues to pay the second-highest yield of any energy services company in the world, trust or corporation. Finally, that distribution will now be wholly immune from the impact of higher taxes in 2011 and will almost surely be ramped up as Trinidad grows and industry conditions improve.

Altogether, that adds up to robust total returns for Trinidad to the end of the decade and probably well beyond. The trust has basically been flat since I recommended it more than a year ago, far outperforming all of its rivals during the downturn. And with management positioning it for growth now, that’s certain to continue when the cycle turns up.

In addition, the conversion will also remove foreign ownership restrictions on Trinidad, expanding its share base globally and increasing the odds of a high premium takeover. The shares are cheap selling for just 1.29 times book value and 1.24 times annual sales, far below the valuations on any other energy service company in the world. Buy Trinidad Energy Services Income Trust up to USD14.

Perhaps the most encouraging thing about Trinidad’s move is the market’s reception to it. Since the announcement, the shares have continued to vastly outperform those of sector rivals, a clear sign that Trinidad’s ultimate conversion to a corporation has been priced in literally since November 2006. Business strength, not tax concerns, is what’s driving Trinidad’s price, and that’s true of every other trust as well.

The bottom line: Trinidad has successfully converted to a corporation in the eyes of the market, with no real damage to its share price for that reason. That’s yet another clear sign that no doomsday awaits trusts in 2011, even if the current tax law remains in effect. Rather, Canadian income trusts are going to go where their underlying businesses take them.

If there’s a change in the law, it’s certain to hand us a windfall. But we don’t need tax changes to make money in good trusts. Note Trinidad will remain in the Aggressive Portfolio.

Long term, Trinidad’s business health will depend on robust demand for North American oil and gas. Similarly, Ag Growth is winning from rising use of another form of energy—corn-based ethanol, which is triggering a boom in North American agriculture.

Ag Growth is a leading manufacturer of a wide range of niche products that are critical to the agriculture industry. These are basically components used in portable and stationary grain handling, storage and conditioning, including augers, belt conveyors, grain storage bins, grain handling accessories and gain aeration equipment. The company’s distribution system consists of 1,400 dealers and distributors in 48 US states, nine Canadian provinces and several other countries.

Business is booming. Sales in the first nine months of 2007 rose 62 percent to CAD104 million. Gross margin (sales less cost of goods sold) rose nearly 50 percent, and cash flow surged more than 50 percent as the trust successfully added new assets mostly with acquisitions of small, profitable niche companies on both sides of the border. That continued a record of accelerating growth from prior years.

Last month, the trust added another strategic purchase, Applegate Steel. That Indiana-based manufacturer of livestock gates, panels, feeders and stock tanks has averaged between USD9 million to USD12 million in annual revenue over the last several years.

The deal, which will boost Ag’s manufacturing capacity from a recent acquisition in Indiana, was preceded by the November 2007 purchase of Union Iron. That Illinois-based manufacturer produces other material handling and storage equipment, including bucket elevators, drag conveyors, screw conveyors, truck probes, towers and trusses, distributors, facility load-out equipment and corn degerminators.

An added attraction of the Union Iron deal is that company’s developing line of temporary grain storage systems and accessories. That boosts Ag’s overall technical capability and further leverages it to the boom in American agriculture. It’s also expected to immediately begin adding to cash flow.

Ag may not be a household name in the US, despite the fact that more than two-thirds of its income is realized here. But its success has been noticed on Bay Street, and the shares now sell for roughly three times book value and annual sales. The shares have returned roughly 100 percent in Canadian dollar terms over the past year and considerably more for US investors.

The reason to buy Ag isn’t value or high yield but robust long-term growth. Happily, the trust should more than deliver on its promise in coming years.

According to the International Food Policy Research Institute (IFPRI), the world consumed more food than it produced for the past five years, with grain stocks falling to 1980 levels. Wheat stocks are at their lowest levels in 30 years, and prices for grains of all types have soared.

The key is an unprecedented boost in demand for agricultural products, driven by rising population growth, higher incomes in developing nations and the accelerating use of ethanol for energy. The latter will rise exponentially in coming years, as recently passed US government mandates to use more ethanol in gasoline kick in.

At the same time, farmland has been increasingly converted to other uses and pollution. China, for example, loses 9 percent of its arable land annually to pollution, radically cutting into its demand to feed its people. That’s put increasing pressure on the remaining land in use to boost output, requiring ever-more inputs and efficiencies.

It all adds up to a boom for North American agriculture and robust demand for everything Ag Growth provides. Coupled with management’s demonstrated skill in strategic growth and maximizing efficiency of assets, that adds up to strong growth at the trust for years to come.

Like other trusts, Ag will have to decide what to do in 2011 when corporate taxation is scheduled to kick in. Management states it expects “a reduction in cash available for distribution by the Fund commencing in 2011.”

Ag’s ultimate tax bill will be reduced by the amount of income it generates in the US. But the best defense of its distribution by far is its ongoing growth, which almost certainly will generate enough additional cash flow to cover the current dividend with ease even with a higher tax bill. In fact, even if growth should slow, the third quarter payout ratio of barely 40 percent and relatively modest debt load of 40 percent of assets should support the current level of dividend.

The ongoing slowdown in the US economy does pose a test for Ag in 2008, as does the weakness in the US dollar. The latter continues to clip the Canadian dollar value of US receivables in 2007, though that’s been more than offset by sales growth because of acquisitions and organic growth.

So far, robust demand overseas for food stuffs and at home for ethanol has kept the US agriculture industry from feeling the worst effects of the slowdown. That could change if the US economy really took a turn for the worse and took down foreign demand for food, sending grain prices lower.

For that to happen, however, we’d have to see a lot more bad news on the economy than has happened to date. Also, demand for food has historically been fairly inelastic; it’s literally the last thing people will do without in hard times.

Moreover, the mandate to use more ethanol carries the full weight of Washington, DC, and could be increased in 2009 depending on the results of the US elections. And the rise in global demand for foodstuffs is even more entrenched. The bottom line: Ag Growth looks set for strong growth for years to come. Buy Ag Growth Income Fund up to USD34.

For more information on both Ag Growth and Trinidad, visit the How They Rate Table. Click on the “.UN” symbol to go to the Web site of our Canadian partner MPL Communications for press releases, charts and other data. These are substantial companies, so any broker should be able to buy them, either with their Toronto or US over-the-counter symbols. Ask which way is cheapest.

Note that both trusts pay qualified dividends in the US and 15 percent of distributions are withheld at the Canadian border. Tax filing information is listed on the Canadian Edge Web site under Income Trust Tax Guide. Canadian withholding can be recovered by filing a Form 1116 with your US income taxes.

Ag Growth Income Fund & Trinidad Energy Services Income Trust
Toronto Symbol	AFN-U	TDG-U
US Symbol	AGGRF	TDGNF
Recent USD Price*	30.42	9.36
Yield	5.5%	6.4%
Price/Book Value	3.15	1.30
Market Capitalization (bil)	CAD0.396	CAD0.814
DBRS Stability Rating	none	none
Canadian Edge Rating	4	4

_{*Recent USD Price as of 02/06/08.}