The Case of the Curious Dividend

03/04/2013 8:30 am EST


Jim Jubak

Founder and Editor,

In watching the action in some high-yielding stocks, MoneyShow's Jim Jubak sees a change in behavior that tells him something about the current investor sentiment.

This isn’t quite of the stature of the dog that didn’t bark in the night from Sherlock Holmes, but it’s kind of interesting because of what it tells us about the market.

Typically, when you have a stock that pays a good dividend—or a Master Limited Partnership, or anything with a big dividend—the stock will get a pretty good pop as you go into the dividend date, as investors who want to sort of "harvest" the dividend, buy it just for the dividend.

Those people, once they’ve collected, will then sell after the record date. So typically you then get a dropoff. That’s a typical pattern. One thing that’s interesting is that right now, it doesn’t look like we’re getting the usual dropoff after the record date.

Targa Resources Partners (NGLS) is a master limited partnership that specializes in, as you’d expect, natural gas liquids. They've recently done a deal to move into the Balkans, so it’s kind of a hot master limited partnership. The yield has been 7%, 6.5%, whatever.

The payout date on this stock, not the record date but the actual payout of the dividend, was February 14. The stock kept going up to the payout date, and then has dropped back slightly...but we’re talking about a difference of less than $1 a share between the high on the 14th and the price a few days later, on say February 19.

That kind of falloff is so small that it makes me go hmph. I scratch my head and say, well why isn’t it bigger? Why didn’t the dog bark in the night?

One of the things it tends to make me believe is that in this particular market environment, people are saying, "OK, at 6.5%—which is roughly what Targa yields at this moment—I don’t really see anyplace else to put my money. I like the safety the 6.5% dividend yield gives me if the market pulls back, so I’m not going to sell for that reason either."

What you’re getting here, I think, is a sign. In the lack of selling after the dividend payout, I think you’re seeing signs that tell you something about the market. And what they tell you basically is that this is a market with a fair amount of fear, and some building conservatism.

People are not yet willing to move out of the market to go to cash, because then they’d be selling Targa for that reason. But they aren’t willing to say, "OK, let’s be really aggressive and find something out there in the larger world that I can buy until the next time the Targa quarterly dividend comes around."

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