Russian Dividend Stocks: Not An Investment For Widows and Orphans

by The Sizemore Investment Letter
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Submitted by Sizemore Investment Letter as part of our contributors program

In case you had any concerns about the safety of Russian stocks, you can now set those fears aside. By Kremlin decree, Russian stocks will now start paying higher dividends.

As the Financial Times reported this week, “One of the reasons why Russian companies trade at a discount to their global peers is their historically low levels of dividend payments. In a bid to raise market valuations ahead of a series of privatizations, the Kremlin has been calling on state companies to share a larger proportion of their profits with investors.”

What a spectacular showing of shareholder-friendly management from the former bastion of international communism. If he wasn’t displayed in a glass coffin in Red Square for all to see, I might assume that Comrade Lenin was spinning in his grave.  Yay, capitalism.

Of course, another reason why Russian companies “trade at a discount to their global peers” is that they are located in Russia.

This is a country that still imprisons capitalists when they no longer toe the Kremlin line.  Mikhail Khodorkovsky, the former Chairman and CEO of oil giant Yukos and once Russia’s wealthiest man, has been rotting in prison since 2005 and is unlikely to see his freedom so long as Vladimir Putin rules the country.  But hey, maybe his wife and kids will appreciate the higher dividend payouts promised to Russian shareholders.

I have written for years about the virtues of dividend investing, and I firmly believe that the regular payment of a cash dividend encourages both honestly and managerial discipline.  It’s a lot harder to cook the books or waste shareholder money by chasing empire-building acquisitions when you are committed to writing a check to investors every quarter.  Furthermore, it guarantees that investors realize a return even during a flat market.

But does any of this apply when we are talking about a country that is effectively ruled by thugs and Mafiosi?

Make no mistake; I’m glad to see Russia encouraging its companies to pay a dividend.  All else equal, this is a step in the right direction.  But would I consider buying Russian dividend stocks for my conservative, income-focused investors?  If I did, I would hope that someone would lock me in a mental institution or, at the very least, strip me of my trading responsibilities.

And this is not to pick on Russia; I have been a buyer of Middle Eastern and African stocks in recent weeks via the iShares MSCI Turkey ETF (NYSE:$TUR) and the MarketVectors Africa ETF (NYSE:$AFK). But I consider both to be highly-speculative positions that would only be appropriate for the most aggressive portion of a client’s portfolio.  And while I don’t complain about receiving a dividend on either, the dividend is not a major factor in my decision to invest in these regions.

(This ties into a broader theme that I’ve covered recently and that bears revisiting: Investors should NEVER chase yield.)

In the case of Russian stocks, the payment of a dividend does not mitigate the risks posed by the absence of the rule of law in the country.  Given the risks, investors should only trade Russian stocks with a mind towards short-term price appreciation.

Investors looking for both high current income and emerging market growth should look instead to what I like to call “emerging markets lite.”  Look for established American and European firms with large and growing businesses in the emerging world.

Two I particularly like are Anglo-Dutch consumer products company Unilever (NYSE:$UL) and Dutch megabrewer Heineken (pink:$HINKY).

Disclosures: Sizemore Capital is long AFK, TUR, UL and HINKY.

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