Led by AltaGas Ltd’s (TSX: ALA, OTC: ATGFF) 50.9 percent gain, Canadian pipeline stocks were universally big winners in 2011. Conversely, their major customers–Canadian energy producers–had a very uneven year. CE Portfolio producer returns ranged from Peyto Exploration & Development Corp’s (TSX: PEY, OTC: PEYUF) 33.5 percent gain to a loss-to-sale of 54.4 for Perpetual Energy Inc (TSX: PMT, OTC: PMGYF).

Canadian real estate investment trusts also had a great year across the board. Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) was my top performer. But all four CE Portfolio REITs finished in the black, with an average return of nearly 20 percent.

Electric power generators, however, diverged widely. Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF) was the sector’s top performer both in the CE Portfolio and under How They Rate coverage, returning 35.9 percent. But now-sold Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF) lost 50.1 percent from Dec. 31, 2010, until I sold it Dec. 9, 2011, in last month’s issue.

So passed 2011, one of the most volatile years on record. The year’s total returns for all CE Portfolio stocks are highlighted in the table “Performance.” Stocks not in the Portfolio for the entire year are shown with returns for the period held only.

Like 2010, 2011 was profitable overall. The Conservative Holdings got the better of it, with an average return of 13.1 percent including closed positions. But the Aggressive Holdings also managed to beat the broad-based Standard & Poor’s/Toronto Stock Exchange Composite Index, with an average loss of 7.6 percent versus the index’s 12.4 percent drop. All figures include a 1.8 percent decline in the Canadian dollar versus the US dollar.

Unlike 2010, however, diverging performance between individual holdings was the rule, rather than the exception. And aside from three real blowups–Capstone, Perpetual and Yellow Media Inc (TSX: YLO, OTC: YLWPF)–it wasn’t spawned from underlying business health. Rather, it was due to relative risks as perceived by investors, which in many cases made little or no sense.

Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) and EnerCare Inc (TSX: ECI, OTC: CSUWF), for example, both raised dividends last year. And their numbers and management guidance give every indication they will do so again in 2012 and beyond. Davis + Henderson shares, however, lost 11.8 percent last year, while EnerCare gained 44.8 percent. Today EnerCare yields roughly half a percentage point less than Davis + Henderson, despite the fact that the latter’s dividend boost was 3.3 percent versus 1.8 percent for EnerCare.

Most incongruous is the relative performance of Peyto Exploration–which relies on natural gas for 89 percent of output–and Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF), which relies on oil for 90 percent. Gas started the year on the down-slope, recovered back to the open in June, then crashed to below USD3 per million British thermal units by the end of the year. Oil prices, in contrast, waxed and waned throughout 2011 but finished up by nearly USD10 per barrel.

In short, it was a much better year for producers of oil than gas. Yet it was gas-focused Peyto that outperformed oil-weighted Crescent Point by nearly 30 percentage points.

Investors decided at some point during the year that Peyto was a high-percentage, safe stock for a choppy environment. And they did the same thing with waterheater rental and submetering company EnerCare. As a result, both gained upside momentum that attracted still more buying. Meanwhile, selling begat selling for Davis + Henderson, a scenario that only partially reversed in the last two weeks of the year. And Crescent Point mostly ran in place.

The performance gap between the five best performing and five worst performing CE Portfolio stocks, however, was still more than 90 percentage points. But as I point out in In Brief, most of the Portfolio’s lagging stocks did stage strong fourth-quarter recoveries. Parkland Fuel Corp (TSX: PKI, OTC: PKIUF) came back more than 60 percent to turn a huge loss into a respectable return of 17.9 percent for the year.

The upshot: Perceived risk is still driving prices of dividend-paying stocks. The greater the overall fear level the more desperately investors will seek out what they perceive to be safe havens, and the faster they’ll unload anything that smacks of risk.

On the other hand, when the fear level dissipates buyers can come back very quickly, triggering a robust recovery in the blink of an eye. In other words, nothing based on changeable investor perception alone is permanent, probably less so now than at any time in history. And what applies to stocks that have crashed and burned but remain strong as businesses applies equally to stocks that run up past buy targets.

Looking Ahead: Good and Bad

Last year’s stock market mood was dominated by widespread fear of a reprise of the 2008 credit crunch/market crash/economic recession. That remains the case here in early 2012, though the S&P 500 actually finished the year higher, as did the majority of dividend-paying stocks on both sides of the border.

The fear and negativity are literally paralyzing many investors, particularly those who’ve allowed their politics to influence their decisions. For those who can see past the gloom, however, there are several good reasons to be bullish on Canada in particular in 2012.

First, for the first time in a long while the US economy appears to be returning to a less-erratic pace of growth. Chinese investment and the building overseas natural resource trade notwithstanding, the US is still Canada’s most important trading partner. And several CE Portfolio companies have sizeable investments here.

They include Acadian Timber Corp (TSX: ADN, OTC: ACAZF), Ag Growth International Inc (TSX: AFN, OTC: AGGZF), Artis REIT (TSX: AX-U, OTC: ARESF), Atlantic Power Corp (TSX: ATP, NYSE: AT) Brookfield Renewable Power, Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF), Extendicare REIT (TSX: EXE-U, OTC: EXETF), IBI Group Inc (TSX: IBG, OTC: IBIBF), Just Energy Group Inc (TSX: JE, OTC: JSTEF), PHX Energy Services Corp (TSX: PHX, OTC: PHXHF), RioCan REIT (TSX: REI-U, OTC: RIOCF), Student Transportation Inc (TSX: STB, NSDQ: STB) and TransForce Inc (TSX: TFI, OTC: TFIFF).

Importantly, all of these companies did quite well even when the US was struggling. And they’ve proven their ability to insulate themselves against declines in the US dollar as well. But they’re now in strong position to take advantage from even a mild upturn in this country. And a stronger US would also go a very long way toward offsetting the expected economic weakness in Europe this year as well as any slowdown in Asia.

To be sure, conditions here are far from ideal. But if things keep heading in the right direction, a better US will provide an unexpected lift to earnings for all of these companies, which would almost surely make a huge difference in improving stock price performance over 2011.

Even if the US relapses in 2012, as the bears fear, CE Portfolio companies will continue to be boosted by the lowest corporate borrowing rates in decades. They’ll cut interest costs even more and push out any refinancing needs years in the future. Others will use low-cost debt to spur growth by buying and/or building assets.

Low borrowing costs and strong balance sheets are also likely to induce more companies to boost dividends, though the pace will remain slow as long as management is worried about a 2008 reprise.

But where it does occur it will be a major sign of strength and will likely push share prices higher. Offsetting these positives are several well-known negatives. First, Europe’s financial turmoil looks set to last well into the year.

A full-scale blowout is still highly unlikely, given the financial resources of countries such as Germany and the danger in letting things go too far.

But, at the very least, the Continent looks headed for a slowdown this year, and the euro will remain weak.

A weaker Europe’s primary impact on Canadian companies will be slowed exports, particularly of natural resources. The good news here is overall reliance on the US and Asia should shield companies from the worst effects. But companies with large European investments are likely to be hurt by further euro weakness, which will depress the Canadian dollar value of receivables. The exception is Vermilion Energy Inc (TSX: VET, OTC: VEMTF), whose primary products (oil and natural gas) are priced in US dollars.

Canadian bank stocks would probably fall sharply should the eurozone’s woes become a full-blown banking crisis. If so, however, it would be due to guilt by association with other global banks rather than real business weakness, as the system remains quite well capitalized. Meanwhile, companies that do business with them, such as Davis + Henderson, would continue to grow.

If last year’s action is any guide, the US dollar would benefit from an influx of safe-haven-seeking money, should the euro blow up. That would likely hurt the Canadian dollar’s exchange value and therefore the US dollar value of Canadian stocks and dividends. Unlike in 2008, however, the Canadian dollar was able to hang in there during last year’s turmoil, ending 2011 at near parity with the greenback. That’s a pretty good indication it will outperform expectations in any future crisis and bounce back quickly once the danger has passed.

Global commodity prices have cooled off a bit in recent months. Should that trend continue producers’ earnings and share prices would be hurt. The crash in natural gas prices has been particularly pronounced. We’re going to have to wait for fourth-quarter 2011 earnings to get a read on who’s most affected. But a recovery in gas is unlikely anytime soon, given record inventories and production levels. As a result we’re going to want to be careful about owning companies whose profits, dividends and financial health depend on natural gas prices.

Then there’s the worry the Canadian economy itself could slow or even slip into recession. Some are worried about a possible housing bubble, citing a recent report by Toronto-Dominion Bank (TSX: TD, NYSE: TD) that asserts the average Canadian home is overvalued by about 10 percent.

That’s a far cry from the conditions that preceded the great bursting of the US housing bubble in 2008. And at this point there’s not much evidence anything is really slowing down north of the border to merit alarm. Home sales growth in December, for example, did slow from November’s 5.3 percent, but was still a robust 3.4 percent. Prices were also up 3.9 percent from year-earlier levels. That’s a trend US homeowners can only dream about.

The bottom line is there are risks in 2012 that could hit at least some Canadian stocks hard. Equally, however, there’s every indication that many companies are going to enjoy a fourth consecutive year of solid total returns. Investors can lose a lot of money with the first group, no matter how well the overall averages perform.

Stocks in the second group, however, will both generate strong capital gains and pay hefty dividends, making them among the best investments anywhere.

The Right Moves

Diversification and balance will be just as critical to 2012 as they were in 2011. Try as we might to avoid them, we’re likely to have at least some losers this year. Our best protection is to have roughly equal portions of enough stocks where a stumble at one won’t blow a whole in the overall portfolio.

Having no tolerance for underlying business weakness is equally important. The hardest hits I took in 2011 were from holding onto companies that had recently cut dividends. My sell recommendation on Capstone Infrastructure in December did come with a large loss. But we’re also out before any potential damage should the as-yet unknown dividend cut be larger than expected.

I don’t particularly like taking a loss this way. But I’m willing to risk a Capstone Infrastructure–staying in there so long as there’s a chance of recovery–because nine times out of 10 I’m going to get another Parkland Fuels, i.e. no meltdown of the business and an explosive recovery as investor worries prove unfounded.

On the other hand, had I exited Yellow Media when it first broke its “no dividend cut” pledge in May 2009, I would have avoided another CAD6 per share of downside.

Likewise, exiting Perpetual Energy after its late 2010 cut would have avoided a large loss in that stock this year. And the impact on the overall Portfolio would have been substantial. Without those two stocks the Aggressive Holdings were actually up 1.1 percent on average.

Consequently, going forward I intend to exit any company that cuts its dividend, even if it means booking an immediate and deep loss. It’s also worth noting that we saved considerable additional downside by selling Yellow Media and Perpetual Energy when we did. Yellow Media, for example, went on to completely eliminate its dividend and, barring a miracle, looks headed for bankruptcy.

Perpetual Energy, meanwhile, appears to have caught a break from the Alberta Energy Resources Conservation Board’s ruling that it must shut in 70 gas-producing wells, as it will be compensated for not producing a commodity whose price has crashed. As I’ve said, my view is Perpetual Energy’s management was always straight up with shareholders, and I think it will find a way to survive. But paying no dividend, facing CAD173 million in maturing debt this year and feeling the pain of USD3 per million British thermal units natural gas, I also don’t see any point in owning the stock until the situation improves.

I am making one sale this month, Mutual Fund Alternative Precious Metals & Mining Trust (TSX: MMP-U, OTC: PMMTF). I entered this position in late 2010 as a bet that gold prices would continue to gain strength and finally extend their rally to mining stocks. As it turned out, the yellow metal was extremely volatile but wound up having a good year in balance, finishing the year more than USD130 per ounce higher than it started.

Unfortunately, mining stocks had no such good fortune. In fact, the greater fears of a European meltdown have grown, the worse they’ve performed. As a result, the closed-end fund’s net asset value (NAV) has steadily slipped by nearly CAD2 a unit, even as the premium of market price to NAV has widened out to more than 15 percent. The fund generates little or no investment income, and how it maintains the dividend is basically a black box.

At this point it looks like the dividend is basically sustaining the unit price. That, however, isn’t something I want to count on enduring forever, particularly given the lack of visibility as to how it’s being paid. The upshot is I’m going to eat the negative total return of roughly 10 percent since my initial recommendation. Sell Precious Metals & Mining.

Resolution No. 3 is to prevent any one holding from becoming a large enough part of your portfolio to really hurt you on an unexpected stumble. Odds are a company like Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF) isn’t going to come apart. But after posting total returns of 47, 42.2 and 43.1 percent the past three years, it may be due for a rest. And in any case it trades well above my buy target of USD27, which is based on its safety, yield and dividend growth potential. It just makes sense to take some money off the table, or at least enough to bring the stock back into balance with the rest of your holdings.

As I wrote last month, the ideal place for funds from such profit-taking–as well as loss-taking–is in stocks of companies you don’t already own. This month I have two suggestions. The first is a new Conservative Holding and High Yield of the Month, Shaw Communications Inc (TSX: SJR/B, NYSE: SJR). The monthly yield of 4.6 percent is on the low side of Portfolio picks. But the company more than makes up for that with consistent dividend growth, with another boost of around 5 percent likely this winter.

More important, Shaw is an extremely reliable broadband cable and Internet franchise that’s proven itself capable of thriving in even the worst economic environment. And it’s positioned to profit from exploding demand for connectivity in Canada. Buy up to USD22, either directly in Toronto or on the New York Stock Exchange.

The other addition this month is a closed-end fund to replace Precious Metals & Mining, First Asset Pipes & Power Income Fund (TSX: EWP-U, OTC: FAPPF). The fund’s portfolio is loaded with buy-rated Canadian Edge companies, with Conservative Holding Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF) recently the largest position.

In stark contrast to Precious Metals, First Asset Pipes & Power’s monthly distribution is almost completely covered by dividends paid by its holdings. That not only means there’s no need for tricks to maintain it. It also makes dividend growth possible as well.

If management sticks to its schedule of last year, investors can expect another increase sometime in the spring. But even if the fund shelters its cash, it still retains considerable value for safety, come what may over the next year, owing to the stability of pipelines and power generators.

Long time CE readers know I always prefer individual stocks to mutual funds, whether the closed- or open-end variety, or exchange-traded funds.

But for those who want an easy way to own a basket of Canadian power and pipeline stocks, First Asset Pipes & Power is a great option up to my buy target of USD8.

Rounding out my list of do’s and don’ts, I continue to advise strongly against any strategy that “averages down” buy-in prices on falling stocks. This approach can create huge profits if your falling stock turns out to be another Parkland and it bounces back 60 percent off its lows. But it’s a graveyard for capital if your stock turns out to be another Capstone. And once you start going down that road, it’s very hard to turn back. In fact, chances are you’re going to be increasingly emotionally tempted to put more and more money in.

Remember, no stock knows you own it. If you have more funds to invest, put them into another stock. Don’t double down.

Similarly, I advise strongly against the emotionally satisfying strategy of using hard stop-losses, particularly trailing stop-losses that adjust upward the further a stock climbs. A stop order isn’t a guarantee you’ll be sold out at a certain price. It’s a guarantee your  sell order will come on the market when a price is hit on the downside, however.

If others also have stops at that price, all of those sell orders will hit the market at the same time. And if enough people have stops at that price, the result will be a flood of sells that will temporarily overwhelm buyers and send the stock plunging. You’ll get out. But you may be doing so at a price far below where the stock in question closes.

In 2011 four Canadian Edge Portfolio companies returned more than 40 percent, and one did better than 50 percent. Every single one of them suffered at least one day last year in which it dipped to a level at least 20 percent below its previous high. Those with stops were forced out of good positions and were forced to buy back at higher levels or else watch them go up.

Meanwhile, stops on companies like Parkland would have taken out investors before the recovery, locking in losses for anyone who wasn’t intrepid enough to re-enter.

Mind Your Business(es)

Finally, it’s as important as ever to keep up with the prospects of the stocks you own by keeping a sharp eye on business developments, most importantly when they report earnings.

One of the more important developments in December was Extendicare REIT’s sale of its US Group Purchasing Division for USD56 million, with after-tax proceeds amounting to USD32 million. The cash will further strengthen the balance sheet of the owner and operator of long-term senior care facilities in the US and Canada. That’s a big plus as it continues to adjust to draconian cuts in Medicare reimbursement.

To date management has continued to assure investors that it will be able to maintain the current dividend level.

And it has backed up its words with deeds, mainly the progress in cost-cutting shown in third-quarter numbers.

Bay Street remains generally positive, with two “buys,” two “holds,” no “sells” and no recent action to change opinions over the past year-plus.

There’s also been a wave of insider buys since summer, when the stock price broke below CAD10.

We’re still not back to that level, even after a 20 percent rally in the last two weeks of 2011.

But so long as management is delivering on the numbers, there’s every indication the stock will eventually make it back to double-digits. And the company seems to be building in a worst-case scenario for future Medicare cuts to its profit and dividend guidance.

That’s why I continue to hold Extendicare in the Portfolio and rate it a buy up to USD10 for those who don’t already own it. I am, however, moving it to the Aggressive Holdings to better reflect the risks of operating in a politically sensitive US industry during an election year.

I’m keeping two other stocks yielding in the area of 10 percent as Conservative Holdings. One is Just Energy, a January High Yield of the Month pick. The other is Colabor Group Inc (TSX: GCL, OTC: COLFF).

Colabor also had big news last month. First, it reached a deal to buy Viandes Decarie Inc, a Quebec-based wholesaler and distributor of meat and meat products. Viandes had sales of CAD70 million in fiscal 2011 and complements the company’s existing base of operations in Quebec both logistically and by product line. Terms of the deal weren’t disclosed, but Viandes is expected to be accretive to earnings per share in 2012.

Colabor’s sales are expected to hit CAD1.5 billion this year, up from CAD1.3 billion in 2011. That’s due to a combination of acquisitions and improving market conditions. Meanwhile, the company was able to refinance the remaining CAD10,028,000 of principal on a convertible bond with a coupon yield 7 percent with a new CAD15 million loan not due until Feb. 28, 2017, and paying a coupon yield of just 6.5 percent.

That eliminates all refinancing needs until 2016 and cuts the company’s cost of capital. Moreover, the loan is from Fonds de Solidarita FTQ, a cooperative development capital investment fund that channels Quebecers savings into investments that spur the province’s economic growth. That’s a nice ally for any company with growth ambitions.

Colabor still faces a tough operating environment, and management will be challenged to execute its expansion plans, maintain balance sheet strength and pay its generous quarterly dividend.

Bay Street, however, appears confident it will, with two “buys,” four “holds” and no “sells” among analysts.

One potentially worrisome sign is the bit of insider selling the past few months. The sales, however, coincided with share price gains and followed a long hiatus.

Consequently, they appear to represent executives’ desire to cash in a bit at a good price rather than cash out.

There are certainly no fool-proof stocks. And despite rallying nearly 50 percent off its early October low, Colabor has given us its share of ups and downs this year. As always, however, we’ll let the numbers be our guide. And for now that means keeping Colabor Group in the Conservative Holdings as a buy up to USD11.

Here’s when to expect the next round of numbers of Canadian Edge Portfolio Holdings.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Mar. 8, 2012 (estimate)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Mar. 2, 2012 (estimate)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Mar. 19, 2012 (estimate)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Mar. 2, 2012 (estimate)
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPUF)–Feb. 16, 2012 (estimate)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Feb. 7, 2012 (estimate)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–Feb. 10, 2012 (estimate)
• Colabor Inc (TSX: GCL, OTC: COLFF)–Mar. 8, 2012 (estimate)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Mar. 8, 2012 (estimate)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Feb. 23, 2012 (estimate)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–Mar. 21, 2012 (estimate)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Mar. 23, 2012 (estimate)
• Just Energy Group Inc (TSX: JE, OTC: JUSTF)–Feb. 10, 2012 (estimate)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–Feb. 17, 2012 (estimate)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Mar. 9, 2012 (estimate)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–Mar. 9, 2012 (estimate)
• Provident Energy Ltd (TSX: PVE, NYSE: PVX)–Mar. 9, 2012 (estimate)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–Feb. 29, 2012 (estimate)
• Shaw Communications Inc (TSX: SJR/B, NYSE: SJR)–Jan. 12, 2012 (confirmed)
• Student Transportation Inc (TSX: STB, OTC: STUXF)–Feb. 14, 2012 (estimate)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–Feb. 29, 2012 (confirmed)

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–Feb. 8, 2012 (estimate)
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Mar. 14, 2012 (estimate)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–Feb. 10, 2012 (estimate)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Feb. 23, 2012 (estimate)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–Mar. 16, 2012 (estimate)
• Enerplus Corp (TSX: ERF, NYSE: ERF)–Feb. 24, 2012 (estimate)
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)–Mar. 1, 2012 (estimate)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Mar. 2, 2012 (estimate)
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–Feb. 17, 2012 (estimate)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–Mar. 14, 2012 (estimate)
• Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–Feb. 23, 2012 (estimate)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Mar. 9, 2012 (estimate)
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–Mar. 7, 2012 (estimate)
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–Feb. 29, 2012 (estimate)