I have only one Portfolio change this month. That’s to sell PHX Energy Services Corp (TSX: PHX, OTC: PHXHF) and buy Poseidon Concepts Corp (TSX: PSN, OTC: POOSF).

See this month’s Best Buys for details.

Reflecting dividend-seeking investors’ continuing attraction to safety, our early year winners have pretty much stayed well in the black for the year.

Underperformers, meanwhile, have mostly stayed in the red.

One notable exception is Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF), which in April was down by nearly 40 percent for the year. Riding recovering natural gas prices, the stock has now rocketed back into the black by about 7 percent.

And there’s been similar though less dramatic improvement in our other energy producers as well, including ARC Resources Ltd (TSX: ARX, OTC: AETUF).

As I note in In Brief, I have my reservations about gas’ ability to hold USD3.50 per million British thermal units, let alone move above it in a meaningful way. But purchased below recommended buy targets, ARC and Peyto will score huge returns if I’m wrong and gas really is launching again. And both companies have what it takes to survive another downturn for gas in solid shape, unlike all too many of their peers.

One group of underperformers still facing considerable headwinds are the four Portfolio Holdings yielding 10 percent or more: Extendicare Inc (TSX: EXE, OTC: EXETF), IBI Group Inc (TSX: IBG, OTC: IBIBF), Just Energy Group Inc (TSX: JE, NYSE: JE) and Noranda Income Fund (TSX: NIF-U, OTC: NNDIF).

By definition, such a high yield indicates the paying company faces a challenge, either real or perceived, that could threaten its ability to pay dividends at the current rate. Management’s task is to conquer that challenge, and thereby affirm its ability to keep paying.

Even if it does so, however, the stock price won’t recover and send the yield to a more normal level unless investors are convinced the danger is past. And that can get quite tricky in a fear-driven market like this one.

One reason is there are always investors betting the other way on stocks with perceived challenges. In past years dividend-paying stocks tended to escape this kind of action, as they were generally considered a backwater for traders.

The rise in popularity of dividend investing and the listing of several big payers on the New York Stock Exchange and the Nasdaq, however, has changed all that for now. And the most exposed, arguably, are companies paying dividends from cash flow rather than conventional earnings per share.

All too many investors have bought these stocks for high yield without understanding how they’re able to pay dividends. That makes them likely to react to rumor before facts are available.

Just the Facts

I would hate to believe that’s true of any CE reader. And it’s why I provide what some have described as a crushing amount of detail on every company recommended. Understanding what’s going on has literally never been more critical.

As we get calendar third-quarter results we’ll know a great deal more about how these companies are holding up. Meanwhile, at least based on what we know, critics appear to be still well off base when it comes to how effectively management is dealing with their challenges.

Extendicare faces perhaps the greatest uncertainty of this quartet.

There’s still the possibility Medicare spending will be hacked by another 2 percent if the US Congress and the Obama administration are unable to reach an agreement to avoid the “fiscal cliff” by Jan. 1, 2013.

To prepare, the operator of senior care facilities has been aggressively cutting its cost structure, both on the operating and financial levels.

The most recent successful move is the up-sizing of a CAD100 million offering of convertible bonds to CAD116.5 million, thanks to robust demand.

The notes have a maturity of seven years and pay interest of 6 percent, allowing the company to retire securities yielding 7.25 percent maturing June 2013 on a profitable basis and well ahead of time.

On the operating cost front, Extendicare has now closed on a deal to lease all 21 of its Kentucky-based skilled nursing centers to an “experienced” third-party long-term care operator. This will essentially take the company out of the business of running the facilities, limiting exposure to what’s become a fairly litigious regulatory environment.

The next big date for Extendicare shareholders will be on or about Nov. 14, when the company shares its performance numbers for the third quarter. Based on what we’ve seen in terms of hard news I expect management to affirm guidance and the dividend to be clearly supported.

If that’s the case I’ll continue to recommend this stock as a buy up to USD9; that’s also my advice, while we wait, for those without a position. Note that current Bay Street opinion is divided on the company, with two “buy” ratings, two “holds” and one “sell.”

IBI Group has slipped for most of 2012, hitting a low of USD8.54 on Aug. 8 before reporting what were reassuring second-quarter results. Since then the stock has bounced back to around USD10 and has been range-bound. That’s despite consistent buying by insiders and a generally bullish view on Bay Street, with seven “buy” recommendations versus two “holds” and two “sells.”

As is the case with most high-yielding stocks, IBI’s share price risk is closely tied to its dividend. If the company continues to support the payout the stock is going back to at least the low-teens range it held until early May. If there’s a cut my guess is the share price will probably wind up somewhere around USD8, which is where the most bearish analysts have pegged it.

IBI is currently about 75 percent owned by related entities. That’s the legacy of a merger that made the former income fund the operating entity of IBI’s global partnership of infrastructure designers and service providers. Coupled with the institutional investors in the stock, it means there’s relatively little float, which exaggerates the impact of buying and selling.

That’s definitely been a negative recently. In fact the lower the stock has gone and the higher its yield has soared, the greater the risk to the dividend many investors seem to infer.

The important thing to remember at this point, however, is there’s been no hard news on IBI since earnings were announced last month.

Although it’s possible management will announce another acquisition in the interim, the next news to pay attention to will be the release of third-quarter results on or about Nov. 9.

Until then we can expect to see volatility in the stock, possibly a selloff if overall market conditions weaken. But the only important thing will be how well the company covers in the numbers. IBI Group is still a buy up to USD15 for those who don’t already own it.

Just Energy is a third company selling with a yield of more than 10 percent due to lingering skepticism about its ability to keep paying dividends. The primary bear argument remains that low natural gas prices have depressed market prices for heating and power to the extent that unregulated marketers can’t make a decent margin.

As this rationale goes, it’s only a matter of time before Just Energy won’t be able to attract any new business or even hold onto its existing customers in an economic way. At that point the only option will be to reduce the dividend, which in turn would take the share price lower.

Maybe someday. But we didn’t see anything remotely resembling the bear case in the numbers announced in August for Just Energy’s fiscal 2013 first quarter (ended Jun. 30).

In fact Just Energy added record numbers of new customers and padded its margins by about 6 percent in the process. Results were actually well ahead of published guidance, while the payout ratio for the seasonally weak period dropped from 116 percent to 105 percent of distributable cash flow.

The company continues to diversify its product line, adding a 15 percent stake in a developer of electric vehicle charging stations last month. And management is absolutely unequivocal that the current dividend level is sustainable for the long term, even as it continues to grow the business.

Management’s chief criterion for adding customers is for the investment to pay back within 12 to 14 months. That’s a goal it’s been able to meet routinely, without overextending in terms of leverage.

Just Energy’s long-term success depends greatly on its ability to hedge commodity-price risk.

And I for one never take for granted that the previous reporting period’s success will follow through in the next set of numbers.

To date, however, there’s been nothing to indicate any drop-off in the fiscal 2013 second-quarter numbers that will be coming out on or about Nov. 8.

Current analyst opinion is two “buys” and five “holds” with no “sells,” with most seeing a 12-month target price of at least CAD12. That would still be low enough to produce a yield of more than 10 percent.

My buy target for Just Energy has for some time been USD16, at which point it would yield a more reasonable 7.5 percent; that’s with the caveat, of course, that it’s a buy only for those who aren’t already loaded up on it.

Finally, Noranda Income Fund continues to trade right around where it was when I added the stock to the Aggressive Holdings in December 2011. The reason is there’s been no resolution of the primary issue affecting the company over that time: whether or not it should adopt dissident shareholders’ recommendation to restore the dividend to the level at the initial public offering of CAD0.08333 per unit.

That’s roughly twice the current payout of CAD0.04167–and such a move would no doubt have a commensurately beneficial impact on Noranda’s share price.

The main reason that hasn’t happened yet is management’s contention that it must retain cash to retire all debt and establish a reserve to retire the zinc processing facility that contributes all of Noranda’s income by 2017. That’s when the current zinc supply contract from parent Xstrata Plc (London: XTA, OTC: XSRAF, ADR: XSRAY) expires. The assumption is the company must be ready in case no alternative supplies can be secured and the facility is shut.

An independent review board has been reviewing the case for some months. But the real reason for the lack of settlement is probably the continued back-and-forth in the proposed merger between Xstrata and its 33.7 percent owner Glencore International Plc (London: GLEN, OTC: GLNCF, ADR: GLNCY).

Once that merger either succeeds or fails, we may be able to get a ruling on Noranda’s distribution.

In the meantime, however, the company is using strong cash flows from the zinc refining royalties to pay down its debt and build up reserves.

That’s putting it in better position to eventually ramp up the dividend.

The risk here, obviously, is that the refinery may be still get shut down when the supply contract expires.

But that seems unlikely, as there are no real alternatives for zinc refining in eastern Canada and the US and there’s strong support of local authorities near the plant.

This is another stock for which I watch quarterly numbers closely. But at this point Noranda still looks like a solid speculation up to USD6 for aggressive investors.

The table “Highest to Lowest” shows how the rest of the Portfolio Holdings stack up in terms of current yield. My standing advice is to own a broad mix based on your own risk tolerance. Note that Student Transportation Inc (TSX: STB, NSDQ: STB) is discussed along with Poseidon Concepts in this month’s Best Buys feature.

One thing I absolutely advise against is loading up on a single company, even one that’s slipped well below my buy-under target. Even the strongest can falter. The key is to be diversified over enough strong companies so the demise of one won’t knock you off your game. Only by concentrating your resources do you become truly vulnerable to losing a lot of money fast.

The Next Round

All Portfolio Holdings are expected to announce results for the calendar third quarter of 2012 between now and Nov. 14.

The vast majority should have numbers ready for analysis by the time we publish the November CE.

I intend to send at least one Flash Alert over the coming month with the vitals for companies that report, and a full analysis in the November issue for all those coming in by Nov. 8.

The remaining companies will be highlighted as they appear in Flash Alerts following Nov. 8, with a full analysis in the December CE.

This time around I’m looking for the same things I have in prior reporting seasons. As always, the payout ratio based on distributable cash flow will be a key figure, and I’ll be watching closely to make sure that it’s in line with management guidance.

Underneath that, probably the most important consideration is the growth–or non-growth–of key business lines. For energy producers, that’s basically output growth and costs.

For infrastructure-related businesses such as pipelines and power generation, it’s the progress of ongoing projects that will generate cash flow in coming years.

And for other types of companies revenue growth and margins of what have been the drivers for growth are the critical metrics.

As longtime readers know, I always focus primarily on companies’ revenue that’s reliable and recurring.

The exceptions are when external factors can have a major impact on earnings, as is the case for producers of energy and other natural resources.

Summer price volatility, for example, could affect future dividends of oil and gas producers. Even with these companies, however, I’m really more interested in how they’re positioned to grow the long-run value of their business, i.e. through reserves and production.

Finally, I’m still very interested in debt, particularly companies’ exposure to a potential near-term tightening of lending conditions. We’ve been living with good times on this front for some years.

And forecasts for softer growth in the second half of 2012 and beyond have again convinced global central banks to keep official interest rates low.

As a result, I don’t foresee any tightening of borrowing conditions along the lines of 2007-09. Corporations, banks and individuals just aren’t nearly so leveraged now.

Several times since, however, credit markets have suddenly tightened, forcing even stronger companies to borrow at higher-than-expected interest rates.

The secret to not getting caught out in the cold out is not having large amounts of debt that needs refinancing in a short window.

The good news is our companies continue to pursue very conservative financial policies, using low interest rates to reduce exposure to another crunch rather than to lever up.

I expect to see more of that favorable trend in the third-quarter numbers for our favorites, which provides more reason to continue holding them.

Here’s when Portfolio Holdings are expected to report their numbers.

Note that I don’t send Flash Alerts for non-Portfolio companies but will recap their numbers as reported in your regular issue of Canadian Edge.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Oct. 26 (estimate)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Nov. 7 (confirmed)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Nov. 12 (estimate)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Nov. 9 (estimate)
• Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–Oct. 30 (confirmed)
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–Oct. 26 (estimate)
• Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF)–Nov. 11 (estimate)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–Nov. 9 (estimate)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Nov. 8 (estimate)
• Dundee REIT (TSX: D-U, OTC: DRETF)–Nov. 5 (confirmed)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Nov. 7 (estimate)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–November 9 (estimate)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Nov. 9 (estimate)
• Just Energy Group Inc (TSX: JE, NYSE: JE)–Nov. 8 (estimate)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–Nov. 1 (estimate)
• Northern Property REIT (TSX: NPR, OTC: NPRUF)–Nov. 7 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–Nov. 9 (estimate)
• RioCan REIT (TSX: REI, OTC: RIOCF)–Nov. 6 (confirmed)
• Shaw Communications Inc (TSX: SJR/A. NYSE: SJR)–Oct. 26 (estimate)
• Student Transportation Inc (TSX: STB, NSDQ: STB)–Nov. 9 (estimate)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–Oct. 24 (confirmed)

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN OTC: ACAZF)–Oct. 26 (estimate)
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Nov. 14 (estimate)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–Nov. 2 (estimate)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Nov. 9 (estimate)
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–Oct. 18 (estimate)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–Nov. 9 (estimate)
• Extendicare Inc (TSX: EXE, OTC: EXETF)–Nov. 14 (estimate)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Nov. 1 (estimate)
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–Nov. 8 (estimate)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–Nov. 2 (estimate)
• Pengrowth Energy Corp (TSX: PGF, NYSE: PGH)–Oct. 31 (confirmed)
• PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–Nov. 8 (estimate)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Nov. 9 (estimate)
• Poseidon Concepts Corp (TSX: PSN, OTC: POOSF)–Nov. 8 (estimate)
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–Nov. 1 (confirmed)
• Wajax Corp (TSX: WJX, OTC: WJXFF)–Nov. 2 (estimate)

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–August Portfolio Update
• Artis REIT (TSX: AX-U, OTC: ARESF)–August Portfolio Update
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–August Portfolio Update
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–August Portfolio Update
• Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–August Best Buys
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–August Portfolio Update
• Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF)–August Portfolio Update
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–August Portfolio Update
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–August Portfolio Update
• Dundee REIT (TSX: D-U, OTC: DRETF)–August Portfolio Update
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Aug. 15 Flash Alert
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–August Portfolio Update
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–August Portfolio Update
• Just Energy Group Inc (TSX: JE, NYSE: JE)–August Portfolio Update
• Keyera Corp (TSX: KEY, OTC: KEYUF)–August Portfolio Update
• Northern Property REIT (TSX: NPR, OTC: NPRUF)–Aug. 15 Flash Alert
• Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–August Portfolio Update
• RioCan REIT (TSX: REI, OTC: RIOCF)–Aug. 15 Flash Alert
• Shaw Communications Inc (TSX: SJR/A. NYSE: SJR)–July Portfolio Update
• Student Transportation Inc (TSX: STB, NSDQ: STB)–Sept. 28 Flash Alert
• TransForce Inc (TSX: TFI, OTC: TFIFF)–August Portfolio Update

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN OTC: ACAZF)–August Portfolio Update
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Aug. 15 Flash Alert
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–August Portfolio Update
• Chemtrade Logistics Income Fund (TSX: CHE, OTC: CGIFF)–August Portfolio Update
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–August Portfolio Update
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–August Portfolio Update
• Extendicare Inc (TSX: EXE, OTC: EXETF)–August Portfolio Update
• Newalta Corp (TSX: NAL, OTC: NWLTF)–August Portfolio Update
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–August Portfolio Update
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–August Portfolio Update
• Pengrowth Energy Corp (TSX: PGF, NYSE: PGH)–Aug. 15 Flash Alert
• PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–August Portfolio Update
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–August Portfolio Update
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–August Portfolio Update
• Poseidon Concepts Corp (TSX: PSN, OTC: POOSF)–October Best Buy
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–August Best Buy