When Dividend stocks in an uncertain market
The coming days may not be smooth sailing for equity investors, writes Matein Khalid

While the global markets have recovered from their late February sell-off, triggered by the Shanghai crash in China and the woes of US subprime mortgage borrowers and sellers, it is ominous that volatility is rising on Wall Street. The Chicago VIX, the classic barometer of greed and fear, is now 20 per cent above its New Year’s Eve level. Moreover, the news from Iraq is awful, inflation rules out a premature Fed rate cut, the dollar is on the ropes as gold flirts with $700, central banks from Mumbai to Frankfurt squeeze credit growth, the distress in US housing and Wall Street mortgage backed securities desks deepens, a protectionist Congress has taken aim at Chinese imports and the Bush White House is fast losing political relevance at a time when conflict in the Middle East and low gasoline inventories mean crude oil prices remain above $60. The world will, I believe, not be kind to equity investors in the next month.

In uncertain times, dividends should be the pillar of any stock market strategy. High dividend shares insulate investors from the risk of a market correction or a prolonged range trading malaise. Dividends also reduce the volatility of the overall portfolio and provide a cash yield, regardless of the direction the capital markets take. Dividend growth is also a foolproof indicator of a profitable, well-managed business where the management is optimistic about the future. After all, why increase dividends if the CEO does not expect net profits to rise?

Classic Citi
Citigroup (C) is a classic dividend share, offering a yield of 4.25 per cent or only 50 basis points below the yield on the US Treasury 10-year note. However, unlike Uncle Sam’s IOU’s, Citigroup’s earnings growth is not static. Citi shares had been in a narrow range ever since its legendary dealmaker CEI Sandy Weill retired and handed over the top job to a lawyer Chuck Prince. It made sense to have a lawyer as a CEO, as Citigroup has faced a succession of financial and reputation shocks since 2002. These include the Jack Grubman research scandals, the dud loans to Enron, WorldCom and Parmalat, Bank of Japan’s closure of its private bank in Japan for regulatory missteps, its London traders’ ill fated attempt to manipulate the Euro government bond market, and the sovereign default of Argentina.

However, the bank boasts a formidable franchise with earnings power that is derived increasingly outside the US. Citi has an unassailable presence in the emerging markets, where it owns crown jewel franchises such as Mexico’s Banamex, Poland’s Handlowy, Taiwan’s Fubon, South Korea’s Koram and Japan’s Nikko Cordial. Chuck Prince must deliver on his restructuring plan or lose his job, as hinted by Saudi Arabia’s Prince Al Waleed bin Talal Al Saudi, who was the bank’s white knight when it was in the Fed ICU after ruinous losses in Latin American sovereign lending and commercial real estate in the 1990s. The Saudi Prince complained that expenses were out of control at Citi, up $52 billion. Hence Chuck Prince’s overhaul of the banking colossus. Citi shares can rise above their current 51 to 58-60. After all, a P/E multiple of 10 makes Citi a classic value stock at current levels. The dividend yield of 4.25 per cent means investors get paid to wait for Chuck Prince’s restructuring to bear fruit!

High plays
Unilever is a quintessential multinational, one of the world’s largest vendors of consumer goods, and home and personal share products. Its ADR trades in New York under the symbol UL. Unilever ADR offers investors a 4.2 per cent yield even though its shares have risen 40 per cent in the last 12 months. Singapore’s Cambridge REIT is yet another high dividend play at 7.5 per cent. It invests in warehouse, logistics and industrial facilities in Singapore and the founders include Mitsui and Co.

An alternative to Singapore property REIT’s is shipping leasers such as First Ship Trust, a recent IPO, where the yield is 9 per cent. The Singapore dollar is one of the world’s hardest currencies, the Asian Swissie. As a savings vehicle, it surely beats the US dollar, which has lost 50 per cent of its value against the euro in the past four years.

Top^