Parkland Income Fund (TSX: PKI-U, OTC: PKIUF) has set its post-conversion dividend. The new rate will be CAD0.085 per month, equivalent to an annual rate of CAD1.02 per share.

That compares to the current monthly rate of CAD0.105 per month, an annual rate of CAD1.26 per trust unit. The new level is roughly 82 percent of the old, representing a cut of about 18 percent. Parkland will maintain the current rate for its payments in December and January (ex-dividend date Dec. 29), with the new rate kicking for the first post-conversion disbursement Feb. 15.

We’ll see how the market reacts to Parkland’s decision as the trading week unfolds. The initial response, however, was strongly positive: Units closed up nearly 5 percent Friday–after a pre-open announcement–only slightly off their high point for the day. That was solid outperformance on a day when the broad-based S&P/Toronto Stock Exchange Index fell slightly.

The catalyst was basically a reversal of some of the negative expectations that had built up since the company announced somewhat disappointing third-quarter earnings on Nov. 12, followed by a low-key conference call on Nov. 15.

Management had set a target range for its post-conversion dividend of between 75 and 110 percent of the trust’s CAD1.26 per unit rate. However, the results, including a 150 percent third-quarter payout ratio on compressed refiners’ margins, seemed to indicate the new rate would be at the low end of the guidance range.

Investors, meanwhile, quickly priced in a dividend cut of much more than 25 percent. Units fell sharply from the CAD12.05 open on Nov. 15 to a CAD11.23 close, after hitting a low of CAD10.45. Selling pressure continued to Nov. 18, when Parkland units hit a closing low of CAD10.33. At that point bargain hunters seemed to move in, and the unit price stabilized before rallying back sharply the last couple days.

Parkland’s closing price on Friday is roughly halfway between its trading range of early November and the lows it reached just prior to the dividend announcement. At Friday’s closing price the post-conversion dividend yield is still more than 9 percent.

Canadians who hold the converted shares in taxable accounts will actually receive a 10 percent increase in post-tax yield upon conversion. US investors who hold Parkland in an IRA, meanwhile, will no longer be withheld 15 percent. As a result, the dividend they receive will drop less than 5 percent at conversion.

As for taxable US investors, the CAD0.085 per month post-conversion dividend rate represents a baseline for future increases. In fact, Parkland’s chairman stated as much with the announcement: “A key consideration is to set a dividend that is sustainable in the near term, with the opportunity to increase the dividend over time as we succeed with growth plans.”

As my Nov. 16 Flash Alert made clear, the fuel distributor’s growth plan provides many opportunities to boost revenue, cash flow and dividends going forward. That strongly suggests that the current share price is also a baseline–for future price increases and solid capital gains for shareholders. Accordingly, Parkland Income Fund remains a solid buy up to USD14.