So far so good in 2012.

Not every Canadian Edge Portfolio recommendation outperformed during the first quarter of the year. But on average our Conservative Holdings are up roughly 10 percent. The economically sensitive Aggressive Holdings are ahead by a percentage point, and Mutual Fund Alternatives have added a bit more than 5 percent.

Meanwhile, the broad-based S&P/Toronto Stock Exchange Composite Index is up a little more than 2 percent. And the Canadian dollar is up roughly 2.5 percent against the US dollar, adding slightly to US investors’ returns.

A solid first quarter is absolutely no guarantee things will go well the rest of the year. And there’s no shortage of potential threats to investor returns in 2012, from continued economic weakness in Europe to the ugly crash in natural gas prices since early November, which is only starting to ripple through the energy industry.

More important than this year’s generally solid performance is the fact that the major upside catalyst for dividend-paying stocks Canadian is still very much intact.

And the investment case for Canada as a country remains sound as ever. So long as we have this tailwind, all we have to do is focus on the individual stocks and sectors that will do best.

This has been true for several years now. Canada’s ability to export its natural resource wealth to Asia limited the impact of the 2008 crash on its economy overall, ensuring a much faster recovery than in any developed country except Australia.

Canada’s strong and conservatively run banking system prevented the kind of real estate boom-and-bust that created a still-lingering depression in the US financial and property sectors.

As in the US, government spending and budget deficits are the subject of heated discussion in Canada as well, both on the national and provincial level. Comparing the magnitude of Canada’s challenges to those the US faces, however, is a bit like comparing a few drops of rain to a monsoon.

Moreover, also unlike in the US, one party–the Conservative Party of Canada–holds a monopoly of power in Ottawa and will until it has to call elections in four years. The budget Prime Minister Stephen Harper and Finance Minister Jim Flaherty have proposed does deal out some pain, including a sharp cut in military spending and a raise in the minimum age to receive the Old Age Security and Guaranteed Income Supplement to 67, for all those not at least 54 years of age now.

For investors, however, the budget is loaded with benefits. Canada’s corporate tax rate will remain the lowest in the developed world, while Canadians will continue to enjoy tax incentives for owning dividend-paying stocks. This combination ensures companies will continue to focus on paying and increasing dividends. There are also plans to streamline regulation of natural resource industries, particularly energy.

When the budget will actually go from deficit to balance is a matter of debate and will depend on economic conditions as much as anything else. But if adopted these proposals will close the gap far faster and more effectively than any other developed nation is now doing. And that’s started spurring interest by other countries’ central banks in adding loonies to their foreign currency reserves.

There are challenges, to be sure. Some worry that the country’s real estate market is setting up for a fall, and that Canadians are taking on too much debt. Europe’s economic health has seemed to get worse this year, with even German industrial activity now slowing and unemployment in countries such as Spain nearing 25 percent.

The Spanish government warned this week it may need European Union financial assistance to meet budget targets. That’s a potential threat to any company doing business there, and there’s still a chance the Continent’s credit woes could spread to these shores.

Meanwhile, natural resource markets remain volatile, responding to ever-changing perceptions of just how well Asian economies are doing.

The longer a trend continues, the more likely it is to be interrupted by unexpected events as more investors start to take it for granted. The good news is that at least for this year Canada’s bullish trend looks set to continue.

And that points to another year of solid returns for investors in its best dividend-paying stocks across a range of industries.

Southern Comfort

There was a time following the passage of the North American Free Trade Agreement (NAFTA) in the 1990s that the US accounted for well over 90 percent of Canada’s exports. That’s no longer the case.

As “Getting More Global” shows, the US share of Canada’s exports has declined from 87 percent to 74 percent over the past 10 years, with dollar volume dropping by 4.4 percent. Meanwhile, China, Japan, Mexico and the UK have all dramatically increased their Canadian trade.

The US is still by far Canada’s most important trading partner. But after being a serious drag for the past several years, it’s set to be a major plus this year. In fact the positive impact from a reviving US has the potential to dwarf the negative impact of Europe’s turmoil, even offset any possible slowdown in Asian demand for Canada’s raw materials.

Today’s job report from the US Dept of Labor Bureau of Labor Statistics (BLS) has created the usual sound and fury on Wall Street, with the headline March job-addition number of 120,000 coming in below “expectations” for 200,000.

Less commented on is the fact that BLS data are based on surveys that are wildly revised from month to month. Recent reports have repeatedly been adjusted upwards in subsequent months.

The same BLS report noted a decline in the official unemployment rate to 8.2 percent, even as unofficial surveys showed a dramatic drop in the combined tally of the official unemployed and those who’ve given up looking for work.

Initial unemployment insurance claims–which are rarely if ever revised significantly–actually fell more than expected last week, and the four-week average of claims fell again to levels not seen since the 2008 crash.

There are pockets of weakness in the US, and the housing and home-building markets are still flat on their backs. That’s bad news for Canadian companies leveraged to it, including long-suffering Norbord Inc (TSX: NBD, OTC: NBDFF). That stock is still a sell.

But there’s also growing strength, including what amounts to a renaissance in manufacturing. Companies that in past decades have pulled up stakes and moved to China are now taking advantage of falling energy prices and declining wage pressures to locate facilities here.

US industrial production has grown at a 4 percent annualized rate in recent months. And retail sales were up 4.6 percent for the past week versus a growth rate of just 0.5 percent last year.

Last month I highlighted Canadian companies investing in the US in my Feature Article, Canada’s Southern Exposure. The fourth quarter of 2011 brought a decided pickup in profit from these operations, and there’s every indication from those numbers and accompanying 2012 guidance that they’ll do even better this year and beyond.

In the Canadian Edge Portfolio, the following companies have substantial US investments that have started to show up big in earnings:

• Ag Growth International (TSX: AFN, OTC: AGGZF)
• AltaGas Ltd (TSX: ALA, OTC: ATGFF)
• Artis REIT (TSX: AX-U, OTC: ARESF)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)
• Chemtrade Logistics Income Fund (TSX: CHE, OGTC: CGIFF)
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)
• Just Energy Group Inc (TSX: JE, NYSE: JE)
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)
• Student Transportation Inc (TSX: STB, NSDQ: STB)
• TransForce Inc (TSX: TFI, OTC: TFIFF).

More important, each of these companies looks set to accelerate their growth in the US in 2012 and beyond with new investment and growing returns from existing operations. They’ve also done a very good job of controlling exposure to the ups and downs of the US dollar-Canadian dollar exchange rate, using a combination of natural hedges such as matching expenses and revenue as well as financial hedges to lock in the value of cross-border/cross-currency cash flows.

I’m bullish on all them. Only Extendicare REIT (TSX: EXE-U, OTC: EXETF) rates a hold, at least until it completes a planned conversion to a tax-paying corporation later this year.

Canada’s natural resource patch also figures to be a big winner from accelerating US growth. The market for copper, iron ore and metallurgical coal is now much for in Asia than in North America. But the US is still a very large market, still the biggest one for Canada’s output of many resources such as energy.

Rebounding US growth therefore has the potential to have an impact that will dwarf any drop-off in Europe or even from emerging Asia. Faster growth in the US may even help the long-suffering natural gas market, though perhaps not in time to save the most vulnerable. (See Dividend Watch List.)

The Obama administration still hasn’t approved TransCanada Corp’s (TSX: TRP, NYSE: TRP) proposed Keystone XL pipeline to bring tar sands region output to Gulf Coast refineries. Nor is the president likely to do so before the November election, as it would ignite controversy between labor unions and environmentalists. That’s caused Prime Minister Harper to declare it a “national priority” to expand export capacity to Asia.

President Obama has given the green light for regulators to approve the southern segment of the pipeline. After the November votes are in, it’s likely the rest will be OK’d as well.

And the strong Canadian dollar has given TransCanada the ability to finance the work cheaply. TransCanada–which is also on the verge of bringing a nuclear plant on track that will produce up to 25 percent of Ontario’s electricity–is a solid invest-to-grow story and great buy up to USD45.

US growth figures to be a major plus for several major Canadian banks, which unlike now-exited Royal Bank of Canada (TSX: RY, NYSE: RY) continue to profit from investments made at the height of America’s financial crisis. Bank of Nova Scotia (TSX: BNS, NYSE: BNS), which boosted its dividend another 5.8 percent last month, remains our favorite of the group. It’s a buy up to USD60.

Restaurant franchise companies such as A&W Restaurant Royalties Income Fund (TSX: AW-U, OTC: AWRRF) are already prospering, as same store growth fires up at their US operations. A&W is a buy under USD22.

Even Superior Plus Corp (TSX: SPB, OTC: SUUIF) is seeing a recovery, as strength in operations geared to US industry are offsetting weather-related weakness in propane distribution. Superior Plus is a buy for speculators up to USD8.

The best thing about this US spur to Canadian company profits is that investors have basically ignored it, at least to date. This is hardly surprising, given that virtually all news on the US economy is generally presented through a partisan filter. Unlike in 2008 Wall Street is decidedly anti-Obama, and the word from the opposition Republicans is that everything in the US is going down the tubes, fast.

That’s to be expected in any election season, particularly one as hotly contested as this one. The operating numbers, however, don’t lie. Neither does the dividend growth that flows from higher earnings.

And that’s a powerful, underappreciated catalyst for growth for the best dividend-paying Canadian stocks in 2012 and beyond.

Domestic Bliss

To hear some domestic commentators tell it, Canada’s economy is dancing on the brink of disaster.

You’d be hard pressed to find any real evidence of that, however, at least in the country’s actual operating numbers.

For one thing, the country is still adding jobs, and lots of them. As “Spring Jobs Surprise” shows, the country’s March job gains were more than seven times what the consensus of economists had been forecasting.

That’s extraordinary, as a demonstration of both the resiliency of the Canadian economy and how out of touch pessimistic sentiment is with the reality on the ground.

Canada’s unemployment rate is now down to just 7.2 percent from a prior 7.4 percent.

As “Great White Stability” shows, the country’s inflation rate has been well behaved for nearly two decades. And it shows no sign of being anything but stable going forward. Corporate borrowing rates remain extremely low and stable, with the yield on 10-year bonds at the lowest level in decades.

This means several things. First, corporations are still able to borrow at rates low enough to dramatically increase the success rate of investments in everything from infrastructure to marketing and distribution networks. This is fueling unprecedented growth of energy pipelines, processing centers and transport networks but also a range of complementary projects, including schools and roads.

Bird Construction Inc (TSX: BDT, OTC: BIRDF) is a major player in the latter trend. The stock is pricey at the moment. But the 9.1 percent dividend boost last month won’t be the last. Bird Construction, a hold at current prices, is a solid buy on any dip to USD13.50.

Consistently low interest rates and inflation also mean companies still have the ability to refinance debt at rates that will cut interest costs and improve balance sheet strength. This is a major spur for growth all across North America and the economic spectrum as well as the best possible insurance that companies will be able to weather any future tightening of credit conditions, no matter how sharp or unexpected.

Low inflation is also bullish for the Canadian dollar, as it provides the central bank more flexibility than virtually any other country to keep rates low to encourage more growth.

And a generally strong loonie–currently at about parity with the US dollar–gives Canadian companies a lot of buying power to invest in US dollar assets, and further increase their ability to take advantage of rebounding growth here.

In recent months some have raised alarm bells that the country’s good fortune over the past few years has gone to its head. They worry about rising levels of debt leverage and a potential bubble in property prices, particularly in major cities such as Toronto and Vancouver, as potential harbingers of a US-style real estate meltdown.

The good news is that’s about as likely as a snowstorm during a Washington, DC, summer. Leverage is rising, but only for those who can afford it, i.e. the wealthiest Canadians. Most continue to maintain relatively modest levels of debt.

There is no subprime lending in Canada, and there never was much even before the 2008 crash. There’s no mortgage tax deduction to encourage property ownership, as in the US, and putting 20 percent down on home purchases is considered the absolute minimum for most banks.

Finally, the “overvaluation” of property is pretty much confined to the most desirable places, where space is always at a premium.

As leading real estate agent franchiser Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF) reports in its fourth-quarter numbers, in most places home property values continue to rise modestly, as they have in recent years. The company’s transactional dollar value in 2011 was up 10 percent from 2010 levels, 7 percentage points from higher selling prices and 3 percentage points from greater home sale activity.

And it actually accelerated to 11 percent in the fourth quarter. The figure for transactions was mostly due to the company’s continuing acquisitions of new agencies, which now include 15,061 realtors operating under 389 franchise agreements equating to a 22 percent national market share.

Brookfield Real Estate Services now derives roughly two-thirds of its revenue from fees that are independent of real estate prices and activity.

Its share price reflects the volatility of opinion of where Canada’s real estate market is headed.

But its business numbers show clearly the company’s prospects–and, by extension, the market’s as a whole–remain solid.

Fourth-quarter funds from operations per share were up 7.7 percent, and the payout ratio sank to 66 percent, very strong support for the 8 percent plus yield, which is paid monthly. Brookfield Real Estate Services is a buy up to USD14.

Even if Canadian real estate did soften, the lack of leverage to the property market would keep the country’s banks healthy, as would superior capital ratios that continue to improve. That’s another stark contrast to the situation in the US prior to the 2008 crash.

As for the country’s real estate investment trusts, even those expanding fastest now continue to adhere to ultra-conservative principles when it comes to any new acquisitions or construction. Greenfield projects are routinely 90 percent or more filled under long-term leases before a spadeful of earth is turned or a loonie raised to finance them.

The typical acquisition, meanwhile, is a building or shopping center with occupancy rates of 95 percent or better, anchored by investment grade corporations under long-term leases. And it’s being financed by a combination of equity–which is at its most expensive in decades–and debt at the lowest borrowing rates in decades.

RioCan REIT (TSX: REI-U, OTC: RIOCF) continues to adhere to the principle of not allowing any one renter to contribute more than 5 percent of overall revenue. This policy has enabled the shopping center owner to sail through even the greatest debacles of recent economic history.

And it’s why the REIT is now able to expand its base of high-quality properties at a rapid rate, setting the stage for even stronger growth to come. Buy RioCan REIT on dips to USD25 or lower.

The bottom line is the property market in Canada is as different as night and day from the US market circa 2007-08. Unless the country’s financial and real estate institutions do a complete 180 and abandon conservative principles, there’s absolutely no chance of a 2008-style property meltdown there.

A real slowdown in Asia–and, by extension, the region’s appetite for Canada’s natural resources–is probably the single most important potential risk. However, despite the handwringing about dropping demand for certain commodities, that’s not in the numbers.

Yes, Chinese import demand does fluctuate, as companies and the government adjust inventories. But we’ve seen this before and there’s little to indicate any real waning of demand, as that country rapidly urbanizes.

This leaves more industry-specific risks such as the crash in natural gas prices as the primary danger to investor returns this year.

And as I point out in Portfolio Update and elsewhere in this issue, how we as investors navigate them will be the key difference maker in what kind of returns we realize this year.

A solid macro prognosis also carries little weight when it comes to the fortunes of companies involved in critical business negotiations.

That definitely applies to Noranda Income Fund (TSX: NIF, OTC: NNDIF), as the independent committee determines how much dividends the part owner of North America’s second leading zinc processing facilities should pay. Noranda is a buy up to USD6 for speculators only.

Extendicare REIT, too, faces some potential tough sledding, should the US slash Medicare spending more than is already expected. Although all appears peaceful now, investors must always remain sensitive to a potential changes in regulation that threaten profitability in other industries, from possible environmental constraints in the energy industry to restrictions put on leading communications services companies such as Shaw Communications Inc (TSX: SJR/B, NYSE: SJR).

The good news is with at least four more years of the Harper-led Conservatives likely, Canada offers perhaps the least amount of regulatory threats of any major country to any industry.

Budget pressures have prevented some strapped provinces such as Ontario from dramatically slashing tax rates, as Ottawa continues to push. But even here there’s increasingly a pro-investment agenda. And there are few more bullish signs for prospective investment returns.

Most bullish of all, Canada remains the world’s most dividend-friendly country. That’s in part because of favorable tax advantages granted to Canadian investors, for which Canadian dividend-paying stocks are the best possible choice for long-term growth and income.

But it’s also due to an ethos that refused to die when the Conservatives flipped on the issue of taxing income trusts back in October 2006. That is that no matter what the taxation system, dividends are a fundamental part of investor returns as well as a constant reminder to management to practice the utmost discipline when it comes to deploying capital.

Only Canada features so many companies that pay dividends monthly. Some former trusts, such as Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE), adopted the dubious strategy of converting to a corporation and then gutting the dividend, in the name of becoming “growth” companies.

And Penn West and its like have been punished by the market, even as converting companies that didn’t cut dividends–including Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF) and Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–have been rewarded.

Management certainly gets it. That’s why a growing number of the former trusts are once again ratcheting up dividends. Even companies not known for paying out big are pushing up their payouts.

As the saying goes, a bird in the hand is worth two in the bush–and a growing dividend now is similarly worth at least two-fold any IOU for future growth offered by a non-dividend paying company.

Some businesses aren’t well suited to pay dividends, and even the strongest can stumble. But you won’t find any country in the world with so many companies willing to pay dividends, and which have proven their ability to do so.

For income investors that’s about as bullish as it gets.

The bottom line is there’s danger in Canada, just as there is everywhere else. But the overall prognosis remains on bullish on a multitude of counts. And that’s all the room we should need to make 2012 a profitable year for Canadian Edge, just as 2009, 2010 and 2011 were.

It’s not too late to buy Canada if you haven’t yet.