Safety: That’s what was hot in 2012. And aside from a brief window early in the year, taking on risk most decidedly was not. In fact, here in the fourth quarter almost any disappointment can trigger massive selling momentum.

Investors continue to fear a reprise of the crisis of 2008-09. And memories of the evaporation of once hot dividend-paying companies such as Yellow Media Inc (TSX: YLO, OTC: YLWPF) have conditioned some to sell any time a stock gives ground, for fear of suffering a similar fate.

On the other hand, many investors seem willing to pay almost any price to buy certain companies, particularly if they operate in favored sectors. Industries with reputations for generating reliable revenue under adverse conditions tend to attract the most buying momentum. Meanwhile, sectors perceived as vulnerable to slowdowns are pulling in least.

The upshot is some sectors have a whole lot of very cheap stocks, many of which have shown little or no real business weakness. Other groups, meanwhile, include mostly high-priced fare because they’re perceived to have little or no major business weaknesses.

I parse out the 160-plus companies in the Canadian Edge coverage universe into 14 different sectors based on their primary lines of business.

Not all of my sectors match up with those used by Standard & Poor’s. In fact, because of this advisory’s focus on dividends more than a few of the stocks don’t show up in major averages, period.

The sectors we use do, however, accurately reflect the nature of the business each company operates in. And represented companies do feature quite a few commonalities that distinguish them from a risk and reward standpoint for investors.

Below I break down the 14 How They Rate groupings one by one. I look at how each sector has performed in 2012 from a fundamentals standpoint as well as in the stock market. I examine the prospects for 2013 based on where things are headed and identify the best and worst companies.

In general I continue to favor dividend-paying stocks over companies that hoard their cash. Hefty payouts reward investors for being patient, and a rising dividend is the surest way to ensure capital gains, as share prices follow an increasing payout higher.

I’m also more attracted to stocks for 2013 that were out of favor in 2012, provided the reason for being shunned was not real underlying business weakness. Once a stock takes a dive in this market it can be a long time before it attracts buyers again, even if it continues to report solid results. But value does eventually win out. And those willing to be patient can often realize big gains.

Finally, I’m a bit wary of the sectors that have been in favor most of this year. That’s not because they don’t feature super companies. It’s just that there’s more room for disappointment that could trigger a pullback.

The best way to deal with over-valuation is just to adhere to buy targets I’ve laid out based on safety and prospective return. So long as you don’t pay more than that, you’ll have a real value on your hands.

Energy Producers: Volume over Price

By any measure it was a rough year for Canadian energy producers. Natural gas prices were already in the middle of a steep decline when the year started and kept on diving in the face of still-rising production and record mild temperatures, finally reaching a low of under USD2 in late April.

At that point falling production and rising demand for generating electricity started pushing gas up again, with the price reaching the USD3.50 to USD4 range by autumn.

As soon as gas bottomed, however, oil prices began to slump, plunging under USD80 a barrel by late June. Black gold is still roughly 15 percent below where it began 2012. Meanwhile, prices of natural gas liquids (NGL) such as propane and ethane have plunged on temporary oversupply and what’s still a relatively illiquid market.

The upshot is energy producers have generally seen profits drop in 2012 from last year’s levels. In fact, AvenEx Energy Corp (TSX: AVF, OTC: AVNDF), Enerplus Corp (TSX: ERF, NYSE: ERF), Pengrowth Energy Corp (TSX: PGF, NYSE: PGH), Progress Energy Resources Corp (TSX: PRQ, OTC: PRQNF), Talisman Energy Inc (TSX: TLM, NYSE: TLM) and Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF) all cut dividends.

Others, such as Advantage Oil & Gas Ltd (TSX: AAV, NYSE: AAV) and Perpetual Energy Inc (TSX: PMT, OTC: PMGYF), seemed at times to teeter on the edge of bankruptcy.

The best performers in the sector were companies that accepted takeover offers: Nexen Inc (TSX: NXY, NYSE: NXY) and Progress Energy. Progress’ deal looks likely to close, Nexen’s is less certain. Both involve foreign companies gaining control of Canadian assets. Neither stock is particularly attractive now, nor is it likely to repeat its performance.

The other sector stock to post solid gains this year is Vermilion Energy Inc (TSX: VET, OTC: VEMTF), one of this month’s Best Buys and one of the few producers to boost its dividend. Vermilion remains attractive because it sells energy in other markets besides North America and has a very predictable and rising production profile.

Increasing output and reserves is how energy producers create value for shareholders. Other companies that look set to boost production the next few years include ARC Resources Ltd (TSX: ARX, OTC: AETUF), Baytex Energy Corp (TSX: BTE, NYSE: BTE), Bellatrix Exploration Ltd (TSX: BXE, NYSE: BXE), Bonavista Energy Corp (TSX: BNP, OTC: BNPUF), Bonterra Energy Corp (TSX: BNE, OTC: BNEFF), Canadian Natural Resources Ltd (TSX: CNQ, NYSE: CNQ), Cenovus Energy Inc (TSX: CVE, NYSE: CVE), Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF), MEG Energy Corp (TSX: MEG, OTC: MEGFF) and PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF).

All of these companies present compelling values at prices listed in the How They Rate table.

I don’t expect to see much in the way of stock market gains until perception grows that energy prices have stabilized. But they’re also far less vulnerable to a continued slump in energy prices than the rest of the companies I track in this sector.

Electric Power

Power generation companies have fared generally well in 2012 for pretty much the same reason oil and gas producers have had an off year.

Mainly, revenues are locked in with long-term contracts, making them largely immune from commodity-price swings and, in many cases, economic slumps as well.

The main challenge with this sector going into 2013 is valuation.

Two of the three sector representatives in the Conservative Holdings have consistently traded above buy targets, though they continue to perform very well as businesses: Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF) and Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF).

The other company, Atlantic Power Corp (TSX: ATP, NYSE: AT), took a hit last month after projecting sharply lower revenue from two Florida power plants starting in mid-June 2013. Management also revised its payout ratio guidance higher and stated it would have to make successful acquisitions to maintain cash flows.

Since then we’ve seen some residual selling of shares. But there’s also been a flurry of mostly good news, including the purchase of 150 megawatts of operating wind power and 1,000 megawatts of potential solar and wind projects. That’s the kind of positive news/negative perception juxtaposition that usually screams value.

And Atlantic Power remains a buy for those who don’t already own the stock up to USD14.

As for the rest of the sector, Algonquin Power & Utilities Corp (TSX: AQN, OTC: AQUNF) and its partner Emera Inc (TSX: EMA, OTC: EMRAF) present the best values. The rest need either a return to dividend growth or a selloff to make them interesting in a market that’s bid them up due to low perceived risks.

Gas Propane

This sector is actually better described as “Unregulated Energy Distribution.” Performance has been a mixed bag in 2012, ranging from a return of better than 90 percent for Superior Plus Corp (TSX: SPB, OTC: SUUIF) and 50 percent for Parkland Fuel Corp (TSX: PKI, OTC: PKIUF) to a loss of nearly 19 percent for Just Energy Group Inc (TSX: JE, NYSE: JE).

Not surprisingly in a safety-focused market, the difference is due to perceived risk to dividends. While Superior Plus and Parkland Fuel allayed fears with improved results–which were heavily focused on cost cutting–Just Energy’s business growth only added to skepticism. That’s in part because its strategy involves paying costs upfront to grow the business and realizing the benefit in subsequent quarters.

This kind of innovation gets rewarded when investors are upbeat about the economy. It’s punished when the overall fear level rises. And no doubt matters have not been helped by the fact that Just Energy pays dividends from cash flow rather than conventional earnings per share.

My view is investors will be best served in 2013 by focusing on this year’s laggards, including Just Energy, and by considering taking partial profits on the winners.

None of these companies are utilities, and all require careful study of their numbers each quarter. But all appear to be on the right track as businesses.

Business to Business

This group of companies primarily provides goods and services to other businesses. How they fare is heavily affected by their customers’ capital spending cycles, earnings and financial health.

Most of these stocks have had subpar years, largely because of investor worries about the North American economy. The best performer has been Norbord Inc (TSX: NBD, OTC: NBDFF), in large part because it’s been making up losses from prior years. But new buyers should beware. This company is also extremely vulnerable to an economic relapse, given the primary market for its panel board is US homebuilders.

This group lists four CE Portfolio Holdings: Bird Construction Inc (TSX: BDT, OTC: BIRDF), Cineplex Inc (TSX: CGX, OTC: CPXGF), IBI Group Inc (TSX: IBG, OTC: IBIBF) and Wajax Corp (TSX: WJX, OTC: WJXFF). Three of them raised dividends this year.

The other, IBI, is now considered endangered after failing to meet cost-cutting targets in the third quarter. It’s discussed in more detail in Portfolio Update and Dividend Watch List.

As for the three dividend boosters, the key is paying less than the buy target. Both Bird Construction and Cineplex have returned better than 20 percent thus far in 2012 and have become beloved by many investors. They’re headed a lot higher in coming years as they keep on growing. But you’ll do a lot better if you’re patient buying them.

Wajax as well as ShawCor Ltd (TSX: SCI/A, OTC: SAWLF) are cheaper now due to perceived vulnerability to economic swings they belied in solid third-quarter results. Wajax and Shawcor are solid buys.

The only sector stock I’d stay away from still is Armtec Infrastructure Inc (TSX: ARF, OTC: AIIFF), which shows little sign of resuming dividends and despite a better third quarter is a serious bankruptcy risk.

Real Estate Investment Trusts

If any group has been almost universally bought the past several years it’s this one.

Canadian REITs weathered the 2008-09 crash with few scratches as businesses and have since used access to cheap capital to build their portfolios and strengthen balance sheets. As a result most are at their strongest ever.

On the other hand, valuations are also quite high in the sector, to the point where only one REIT in How They Rate now trades below my buy target. That’s Cominar REIT (TSX: CUF-U, OTC: CMLEF), the Quebec-focused company, which has been rapidly expanding with acquisitions.

This aggressiveness is likely why the stock is being shunned. But it’s what will propel cash flow going forward and spur superior unitholder returns.

One positive that will drive these REITs’ value higher is a return to dividend growth. We’ve seen December Best Buy Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) put up numbers that have enabled two distribution increases in as many quarters. And we’re likely to see dividend boosts from the other four CE Portfolio REITs in 2013 as well: Artis REIT (TSX: AX-U, OTC: ARESF), Dundee REIT (TSX: D-U, OTC: DRETF), Northern Property REIT (TSX: NPR-U, OTC: NPRUF) and RioCan REIT (TSX: REI-U, OTC: RIOCF).

Until that happens, however, I’m not lowering my guard by raising buy targets. Remember that safety plays do sell off when market psychology becomes more positive. And only REITs that present growth and value will keep producing favorable returns when that happens.

Mutual Funds

I will almost always choose individual stocks over a mutual fund. I like the control and I’ve found returns and dividends are superior as well when you make your own decisions and don’t pay fees for someone else to make them.

That being said, my list of closed-end funds in How They Rate are mostly very solid fare, particularly the three in the CE Portfolio as Fund Alternatives: Blue Ribbon Income Fund (TSX: RBN-U, OTC: BLUBF), EnerVest Diversified Income Trust (TSX: EIT-U, OTC: ENDTF) and First Asset Pipes & Power Income Fund (TSX: EWP-U, OTC: FAPPF).

All three have generated solid returns this year by focusing on dividend-paying stocks from a range of industries rather than making bets on capital growth. That’s kept them from being knocked around by volatile energy prices and economic worries. And it’s ensured they can finance at least most of their dividends with dividend income from their holdings.

My pans in the group are both funds that pay dividends from sources other than dividend income of holdings. That’s a strategy that will either wind down their capital or eventually trigger a dividend cut. In any case, you’re far better off buying individual stocks.

Natural Resources

As with oil and gas producers, this sector’s earnings depend to a large extent on commodity prices. That’s made 2012 a mostly wild ride for the group, with several companies taking major hits.

Given that action, the biggest surprise this year is that there weren’t more dividend cuts. In fact, the only victim was Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF), which cut its payout three times before finally eliminating the November payment.

The market for pulp products was soft during the year, and competition was fierce. But Canfor is a shoo-in to restore the payout once those conditions improve a bit.

One reason for the lack of cuts is just that companies that been playing things conservatively the past few years with memories of 2008 so fresh. That mindset is likely to continue limiting downside in 2013.

My view, however, is investors should take care with their exposure to this sector, at least until there’s some indication of how US austerity will affect the global economy and hence demand for these companies’ products.

Portfolio picks Acadian Timber Corp (TSX: ADN, OTC: ACAZF), Ag Growth International Inc (TSX: AFN, OTC: AGGZF) and Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) all appear more than capable of weathering another tight year. So does Noranda Income Fund (TSX: NIF-U, OTC: NNDIF), though its total reliance on a single zinc processing facility means investors should treat it as a speculation.

I also like Cameco Corp (TSX: CCO, NYSE: CCJ) as a play on investor over-reaction to the nuclear power industry’s challenges. Barrick Gold Corp (TSX: ABX, NYSE: ABX) is the conservative investor’s best bet on gold. And Avalon Rare Metals Inc (TSX: AVL, NYSE: AVL) shares have shed their hype, even as the company’s plans to develop its key mine are moving towards fruition.

Energy Services

When energy prices are surging, few industries benefit more than these owners of drilling rigs and providers of other oilfield services–which enjoy rising demand and can raise their prices. Conversely, when energy prices slump so does drilling and demand for services drops, along with fees.

As years go, 2012 wasn’t the worst for this sector. But neither was it a particularly easy environment.

First, falling gas prices virtually brought new natural gas drilling to a standstill. Then the drop in NGLs prices made selling them less profitable, and finally oil fell out of bed. Canadian oil companies were doubly hit by pricing differentials, as output was trapped by inadequate transportation infrastructure.

None of the Energy Services companies I track in How They Rate has actually cut dividends. But we have seen some massive selling of sector stocks nonetheless, particularly Poseidon Concepts Corp (TSX: PSN, OTC: POOSF), which is highlighted in Portfolio Update and Dividend Watch List.

In retrospect, the biggest mistake I made in any sector in 2012 was swapping out of long-term holding PHX Energy Services Corp (TSX: PHX, OTC: PHXHF) for Poseidon Concepts.

My reasoning was based on what we knew back in early October when I made the switch, mainly that providing water tanks to existing wells under long-term contract should be a less volatile business than renting rigs. Moreover, PHX’ profits had been crimped by rising costs, particularly at the fast-growing global operations.

As it turned out, however, PHX reported very strong third-quarter results, including solid progress bringing down costs. And despite some very real sector headwinds, the company held market share and reduced its payout ratio.

The fact that drilling is being shut down in so many areas is the only reason I’m not restoring PHX to a buy this month. But it’s definitely back on my radar.

As for Poseidon Concepts, I’m sticking with it for two reasons. One, it earned its dividend in the third quarter and grew the company, despite market conditions that appeared to worsen a great deal. And it appears perfectly capable based on the numbers reported and management guidance to continue covering it.

Second, the selling momentum that caught this stock has left it yielding more than 30 percent. The only way a price like that is justified is if bankruptcy is a real possibility, which is not supported by any facts at this time.

As for bargains in the sector, Mullen Group Ltd (TSX: MTL, OTC: MLLGF) and Newalta Corp (TSX: NAL, OTC: NWLTF) are long-standing buy recommendations that trade at or below buy targets. Both companies are building franchises in their core areas, and shareholder wealth in the process.

The rest of the sector looks headed for a difficult 2013.

Energy Infrastructure

Owners and operators of pipelines and other energy infrastructure have been as favored in Canada as they’ve been in the US in recent years. Each of these stocks is well positioned to continue building fee-generating assets, increasing cash flows and laying the ground work for dividend growth.

In fact all of these companies except Veresen Inc (TSX: VSN, OTC: FCGYF) have been consistently raising dividends.

The problem with the group this year has been high valuations, which have triggered stock-price volatility despite the very steady company results. Keyera Corp (TSX: KEY, OTC: KEYUF), for example, started 2012 sharply overvalued, trading above USD50. The stock then proceeded to crater to a low of USD37.50 in mid-April and has since rallied to the upper 40s-low 50s range again.

Keyera’s moves had nothing to do with any hard news at the company. But the gyrations did create a compelling value in the stock for a short time, allowing those without positions get in.

Keyera’s experience is a pretty clear warning why it makes no sense to chase these stocks, no matter how reliable the growth is. And right now Keyera and most other sector plays are pricey. In fact they’re good candidates for taking partial profits.

By contrast, AltaGas Ltd (TSX: ALA, OTC: ATGFF) and Pembina Pipeline Corp (TSX: PPL, NYSE: PBA) are for the moment selling below buy targets. Both are great buys for anyone who doesn’t own them yet.

As for the rest of the sector, stay cautious.

Information Technology

This sector also generated generally solid returns in 2012, particularly the companies operating networks. The exceptions were companies involved in unregulated sub-sectors. And there was one dividend cut, by Data Group Inc (TSX: DGI, OTC: DGPIF), whose trials and travails are the focus of Dividend Watch List.

Looking ahead to 2013, only two sector companies of high quality trade below my buy target. One is CE Conservative Holding Shaw Communications Inc (TSX: SJR/B, NYSE: SJR). Shaw looks set to boost its dividend roughly 5 percent next month.

The other is Bell Aliant Inc (TSX: BA, OTC: BLIAF), which is building a fiber-optic communications network in less-populated areas of Eastern Canada. It’s more a straight yield play, as dividend growth is unlikely for some time, if ever.

As for other buy-rated companies in this sector, the best idea is to wait on a pullback. And investors should note that the group lists more than its share of sell-rated companies.

Just like in the US, communications is a game where scale is critical. The little guys just can’t keep up over the long haul and so are generally best avoided.

Financial Services

As David Dittman points out in this month’s Canadian Currents, this country’s financials are still on far firmer ground than their US counterparts. That’s the result of relentless conservative financial and operating policies. Our favorite straight-up bank is Bank of Nova Scotia (TSX: BNS, NYSE: BNS).

The group’s best income bet, however, is Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF). The stock is cheap, largely due to extreme bearishness about Canada’s housing market. But fees guarantee more than two-thirds of its income, and these don’t change regardless of housing market activity or prices.

Moreover, the company is ultimately backed both financially and managerially by Brookfield Asset Management Inc (TSX: BAM/A, NYSE: BAM). And there’s a fair chance the Canadian property market has seen its worst as well, as more restrictive mortgage rules are stanching any hint of a bubble.

I’m a bit cautious on Royal Bank of Canada (TSX: RY, NYSE: RY). That’s because Canada’s largest bank has to refinance debt of more than USD30 billion over the next two years, a level equal to more than 35 percent of the company’s prodigious market capitalization.

As for the rest of the sector’s buy-rated companies, my advice is to watch those buy targets and only buy below them.

Food and Hospitality

This sector group features companies that collect royalties from restaurants using their brand name as well as food logistics and transport firms, specialty products makers and popular consumer destinations.

That adds up to a diverse group, some of which are exceedingly conservative while others are equally aggressive.

What they have in common is all of these companies do better when the North American economy is running well. But they’ve also proven they can take a punch in more difficult times.

The only member of the group in the CE Portfolio right now is Colabor Group Inc (TSX: GCL, OTC: COLFF), which is also the only company on the list to cut its dividend this year. At the time I said I would stick with Colabor so long as management continued to add assets and make progress with cost cutting.

That’s been the case since the cut in the dividend that was declared in mid-March. And so long as that continues I’ll stay with Colabor.

Both A&W Revenue Royalties Income Fund (TSX: AW-U, OTC: AWRRF) and Premium Brands Holdings Corp (TSX: PBH, OTC: PRBZF) are also trading below my buy targets for the moment.

The former is the owner of what amounts to an annuity, raking in revenue from a growing pool of A&W restaurants. Premium Brands is a similar company to Colabor, though with a few less challenges.

As for the rest of the group, they’re either plagued by too-high valuations or are in chronic decline, as is the case with Ten Peaks Coffee Company Inc (TSX: TPK, OTC: SWSSF).

Avoid them, at least until the price is right.

Health Care

This sector is feeling cost pressures on both sides of the border.

In the US the threat is from further reductions in Medicare reimbursement rates as a result of fiscal cliff negotiations. In Canada it’s turmoil in the provinces, particularly Ontario, which recently pulled the rug out from under CML Healthcare Inc (TSX: CLC, OTC: CMHIF) by cutting reimbursement fees for services.

In a sense, rising health care costs in recent years have made this reaction inevitable. And there are wide swaths of the industry that still aren’t affected by the cutbacks. One of these appears to be Medical Facilities Corp (TSX: DR, OTC: MFCSF). The owner of specialty hospitals posted very strong third-quarter results in addition to locking in future cash flows with the acquisition of an Arkansas surgical hospital in late November.

On the other side are CML and Extendicare Inc (TSX: EXC, OTC: EXETF). Both have now been hit by government-mandated cuts in reimbursement rates.

Extendicare has handled it well thus far by cutting costs to offset. But it faces uncertain fallout from Washington’s budget negotiations. I’m sticking with Extendicare for now given its strong third-quarter operating results and combination of low price and high yield.

CML’s dividend, meanwhile, appears to be at risk after reporting weak third-quarter results.

The upshot is investors should take care in entering new positions in this sector.

Transports

This is one economically sensitive sector that’s nonetheless performed very well in the stock market and as businesses over the past year.

One key catalyst has been growth in volumes of natural resources shipments. Other sector companies have prospered by building valuable niches in key sectors, such as tar sands development.

In most sectors in the CE coverage universe I tend to favor higher-dividend-paying companies. By contrast, this sector’s most attractive plays are mostly lower-yielding fare, with higher yielders presenting significant risks I don’t want to take.

The big-dividend exception is Student Transportation Inc (TSX: STB, NSDQ: STB), which earns fees from owning and operating school bus systems throughout North America.

Rising cost pressures on school systems have led many to either contract out running their buses or to outright sell them. Student Transportation benefits from both moves and when it adds revenue it eventually adds cash flow.

As for the rest of the sector, most of the companies are attractive buys at a lower price. But after this year’s solid performance, the best idea is to wait for pullbacks. That also goes for Conservative Holding TransForce Inc (TSX: TFI, OTC: TFIFF), one of my top-performing stocks this year.

The most vulnerable companies in the sector are special situations. Chorus Aviation Inc’s (TSX: CHR/B, OTC: CHRVF) fate lies in what arbitrators decide in its dispute with Air Canada Inc (TSX: AC/A, OTC: AIDIF).

Bus manufacturer New Flyer Industries Inc (TSX: NFI, OTC: NFYED) is losing ground as cash-strapped municipalities delay purchases.

Both are best avoided until business definitively turns for the better, which may or may not happen in 2013.