There’s no more certain sign of a healthy company than dividend growth. Equally, a rising payout is the most reliable catalyst for capital gains, as share prices rise over time to reflect higher disbursements.

After long hiatuses both of December’s Best Buys recently returned to dividend growth.

And judging from bullish numbers and guidance there’s plenty more where that came from for Conservative Holding Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) and Aggressive Holding Vermilion Energy Inc (TSX: VET, OTC: VEMTF).

CAP REIT’s 1.4 percent boost, announced in late November, is its second increase in as many quarters. The previous 3.3 percent increase, declared in mid-August, was the first boost since September 2003. Together they add up to a nearly 5 percent hike and set a clear precedent for more growth ahead.

CAP REIT’s return to dividend growth has been made possible by an extraordinarily successful investment strategy over the past several years. The REIT had already carved out a secure reputation as a virtually bullet-proof property owner, focused on only super high-quality locations in the most stable real estate subsector (apartments).

The result has been steady rent growth and consistently high occupancy rates averaging 98 percent or better, even during the worst of the 2008-09 recession.

Holding up well during a crisis of confidence kept CAP REIT’s dividend secure. That’s in marked contrast to the wipeout suffered by many US real estate investment trusts and some of its Canadian rivals as well.

This has given CAP REIT one of the lowest costs for expansion capital in its sector, and management has turned that to full advantage with a string of profitable acquisitions.

CAP REIT’s full-year 2012 revenue is expected to come in at CAD411 million-plus, a gain of nearly 30 percent from 2008 levels. More important, the annualized payout ratio based on distributable cash flow has migrated down from the mid-90 percent range to under 80 percent, a trend that should continue to open up room for more dividend growth.

In fact CAP REIT’s ability to access low-cost capital is arguably at an all-time high. This week the company closed an equity offer of 6.7 million units at CAD24 per, within a few percentage points from its all-time high. The CAD160.8 million in proceeds will repay a portion of its CAD328.2 million drawn on credit facilities, including a CAD100.2 million bridge loan to fund 17 acquisitions completed since June 29, 2012, at a total cost of CAD707.9 million.

CAP REIT’s debt load, meanwhile, is a modest 50.2 percent of total capitalization and 51 percent of gross book value. The latter figure is down from 55.35 percent a year ago, demonstrating management’s focus on its balance sheet as well as ability to raise equity capital to fund growth.

As is the case for most REITs, the vast majority of debt is held on the property level as mortgages rather than with the parent as ordinary bonds. Debt is mostly tied to cash flows from properties owned, providing a layer of insulation for the REIT’s own balance sheet.

The average interest rate on these mortgages is 4.03 percent, down from 4.63 percent a year ago. The average term to maturity, meanwhile, is 5.3 years, roughly flat with year-ago levels. These numbers should improve again in the fourth quarter, as the company closed CAD387.4 million in new mortgages with an average term to maturity of 8.9 years at an average weighted interest rate of just 2.91 percent.

CAP REIT saw solid improvement in interest coverage and debt service ratios from 2011. And the Canada Mortgage and Housing Corporation insures 93.1 percent of its mortgage portfolio.

That’s a clear demonstration that it’s taken advantage of record-low corporate borrowing rates to strengthen its balance sheet rather than lever up for short-term growth.

This conservative approach to the balance sheet applies to operating policies as well.

Over the past few years CAP REIT has expanded its portfolio from its traditional base in Eastern Canada to faster-growing areas in the western energy patch and along the Pacific Coast.

The result is far better geographic diversification that’s insulated the company from regional market disruptions and speeded up growth as well.

Third-quarter revenue surged 17.6 percent, but occupancy remained high at 98.5 percent of available space, with much of the rest accounted for by upgrades.

Rents rose a steady 2.7 percent at properties owned for at least one year and remain below market nationally, providing future upside as well as downside protection.

And funds from operations per unit–the best measure of REIT profitability–rose 12.1 percent despite a 22 percent increase in outstanding units to finance growth.

The upshot is more distribution growth for Canadian Apartment Properties REIT, justifying a bump up in my buy-under target to USD24.

Vermilion’s dividend boost, meanwhile, was something of a surprise, as management had previously stated it would most likely wait until 2015– when the Corrib well off the Irish Coast begins adding to cash flow–for a return to growth.

The 5.3 percent increase in the payout to a new monthly rate of CAD0.20 per unit is the first since an 11.8 percent bump announced in December 2007.

In the interim Vermilion’s claim to fame has been that it was able to avoid cutting dividends in 2008, when oil prices plunged from over USD150 a barrel to barely USD30 in a few weeks. And the company also avoided a dividend cut when it converted from income trust to corporation in 2010.

Only one other former income trust managed the distinction of dodging cuts in both 2008 and again when converting to a corporation. That was November Best Buy Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF), which remains a buy up to USD48 for anyone who doesn’t already own it.

These companies were able to hold dividends while others cut for two major reasons.

First, they control their leverage. Neither has any debt maturities to meet between now and 2015, and debt-to-annualized cash flow is consistently in the neighborhood of 1-to-1, among the very lowest in the industry.

Vermilion’s payout ratio has consistently been under 50 percent as well, allowing it to fund much of its capital spending with operating cash flow.

Second, they’re heavily focused on production of oil and natural gas liquids NGL) rather than natural gas, which has been in a downtrend the past five years.

Vermilion also draws more than two-thirds of output outside North America, including extensive natural gas production in Australia and Europe. This gas sells for global prices that are several times what gas fetches in North America.

Vermilion continues to add properties overseas in selected countries, including the USD86 million purchase of lands in France this month that are complementary to properties it already owns.

France has at this point banned hydraulic fracturing to produce oil and gas, making the country more dependent than ever on existing conventional wells like Vermilion’s. And should the country ever remove the ban the company would likely be able to ramp up output even more.

The French acquisition was announced at the same time as the dividend increase, and its accretive implications no doubt raised management’s comfort level for a boost. The company is also enjoying strong success drilling light oil in Canada’s Cardium region and is on track for expansion in Australia and the Netherlands as well.

The 2013 development capital program, excluding what’s spent on the Corrib field, is expected to increase overall output by roughly 4 percent over 2012 levels. That’s roughly in line with the pace of the third quarter, which saw a 5 percent jump in overall output.

Production is still expected to take a quantum leap in 2015, when the Corrib field begins producing energy. The company’s interest there is an 18.5 percent non-operating partial ownership stake in the property, which is run by a consortium anchored by Royal Dutch Shell Plc (London: RDSA, NYSE: RDS/A). The partners are currently constructing the last piece of that property, a roughly 5.6 mile pipeline.

Vermilion now expects to receive about 9,000 barrels of oil equivalent per day from Corrib starting in late 2014, an amount equivalent to a quarter of third-quarter average daily output. That’s a significant moving of the profit meter and augurs more dividend growth ahead. And it’s in addition to a planned doubling of Western Canada light oil production over that time frame.

One factor that likely prompted management to raise the dividend now, rather than wait until Corrib, is the success of these other development efforts, such as in Canadian shale. Vermilion also has a very large land presence in the Duvernay Shale, an area of immense promise that’s likely to advance both liquids and gas output significantly starting in 2016.

Another likely reason for returning to dividend growth is the company’s plan to list its stock on the New York Stock Exchange (under the symbol VET) by early next year.

Companies that reliably grow dividends are awarded higher valuations than those that don’t.

And with such a developed inventory of producing properties and reserves, as well as market diversification, Vermilion has an ability to forecast cash flows–and therefore fund dividend growth–that’s hard to match among commodity producers.

Despite the stock’s very high quality I had been waiting for a dividend increase to boost my buy target.

This month’s move merits a bump to USD52 for those who don’t already own Vermilion Energy.

With dividends on the rise, I fully expect to continue increasing this target going forward.

What can go wrong at these companies? A global crash in energy prices would obviously have an impact on stocks of energy producers across the board. Vermilion shares, for example, plunged from a high of around USD44 in late June 2008 to a low of roughly USD16 in late February 2009.

The company’s underlying business did stay strong, ensuring a rapid recovery. And Vermilion is definitely better positioned as a company to weather adversity now than it was then.

Operating overseas also entails added political risks. Here too, however, Vermilion’s management team has proven more than up to the task in the past. The company cashed out of its share of Verenex Energy Inc (TSX: VNX, OTC: VRNXF) and its opertions in Libya, for example, well in advance of the 2010 uprising. And focusing on conventional gas has enabled it to benefit from France’s anti-fracking policies.

That’s a far better track record dealing with political risk than even most Super Oils. And the overall political risk of the countries where the company operates now–Australia, Canada, France and the Netherlands–is quite low.

Finally, every producer also runs the risk that what it thought it had in the ground proves uneconomic to actually produce. But diversification offers protection to Vermilion, even as its focus on proven and producing properties for the most part limits real dry-hole risk.

Being over-extended and over-leveraged when property vacancies are rising and rents are dropping is the biggest risk real estate investment trusts perpetually face. CAP REIT’s traditional focus on high-quality properties and its maintenance of a strong balance sheet have historically provided it solid protection against such setbacks. But the larger the portfolio grows, the greater the chance for something to be overlooked.

CAP REIT’s ability to sell properties for profit and its willingness to do so are good signs that management is always on top of its markets and market position. But the risk of overlooking something is a very good reason to continue monitoring occupancy levels and rent growth, particularly in areas that have historically been more volatile, such as Alberta.

In addition, Canada’s housing market has noticeably cooled off a bit in the wake of tightened mortgage lending rules. That’s yet to reduce property values across the country, with the exception of some of the more overheated areas. But if it should it’s possible we would see more home buying and less demand for apartments.

Even then, however, CAP REIT would be well positioned due to its focus on high-end residences and longer-term leases. In fact, tougher lending standards could well improve its markets, by convincing would-be homebuyers to save their money and rent instead.

Higher borrowing rates could eventually reduce the REIT’s revenue growth by making it more expensive to make acquisitions. And it’s possible some investors own CAP REIT and other REITs as bond substitutes and so would temporarily abandon them if bond yields were to rebound.

This won’t happen, however, until the economy picks up steam. And in that case there would likely be more opportunities to raise rents and hence dividends.

In any case, CAP REIT has lived through such environments before and has proved its ability to keep building wealth for its investors.

For more information on Vermilion Energy, go to How They Rate under Oil and Gas. Canadian Apartment Properties is tracked under Real Estate Investment Trusts.

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 mid- to large-capitalization category. Vermilion is a roughly USD5 billion company. CAP REIT weighs in at USD2.5 billion. There’s plenty of liquidity on both sides of the border for these stocks, both in TSX and US over-the-counter (OTC) symbols.

If you buy Vermilion now under its OTC symbol, your shares will automatically convert to the NYSE listing when it’s launched.

Research houses on both Bay Street and Wall Street also decently cover them. Vermilion has 16 followers, with a current line of 10 “buys,” five “holds” and one “sell.” CAP REIT has 11 followers, eight of which rate it a “buy” versus three “holds” and no “sells.” That means 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 paid by both companies are 100 percent qualified for US income tax purposes, though unless there’s a compromise in Washington dividend taxes will be assessed at your regular rate starting in January.

Vermilion converted from an income trust to a corporation in 2010. CAP REIT is a real estate investment trust and still does not pay corporate income tax.

Canadian investors enjoy favorable tax status for both companies, though Vermilion is taxed differently than CAP REIT. For US investors dividends paid by Vermilion 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.