* Market is worst-performing in GCC
* Down 28 percent since street protests began
* Dividend yields very high compared to region
* But liquidity too low for many investors to benefit
* Saudi continues to suck funds from smaller markets
By Nadia Saleem
DUBAI, Nov 14 (Reuters) - Bahrain's stock market is the worst-performing in the region this year, but it has a major attraction: ultra-high dividend yields. Unfortunately, the market has become too illiquid for many investors to take advantage of that fact.
The main Bahrain stock index is down 7.6 percent year-to-date, underperforming all other countries in the Gulf Cooperation Council: Saudi Arabia, the United Arab Emirates, Kuwait, Qatar and Oman. Saudi Arabia is up 6.2 percent.
Continuous street protests, led by majority Shi'ites against the Sunni-dominated government, are dampening investor sentiment and weighing on the economy. The Bahrain index is down 28 percent since the protests began in early 2011, and has reached its lowest level since 2003.
Funds have been leaking out of the market, shrinking its capitalisation to 5.8 billion dinars ($15.4 billion) from 7.73 billion dinars in January 2011.
The country of about 1.3 million people does not have the rapid population growth needed to spur domestic demand in the absence of major export industries, so it is considered a "mature" rather than a potentially high-growth market by fund managers.
In one respect, though, Bahrain's market stands out: the return on stocks available from their dividends. Aluminium Bahrain (Alba) has a dividend yield of 14.0 percent based on last year's dividend, according to stock exchange data; Bahrain Telecommunications (Batelco) has a yield of 9.5 percent and BBK, a major bank, 6.4 percent.
Such yields compare favourably with markets around the region. Qatar National Bank, for example, has a yield of 2.7 percent; Qatar Telecom paid just 1.9 percent at the end of 2011.
"I would look for certain stocks which currently have a double-digit yield and hold them for the long term, not for trading," said a Bahraini investment manager, who declined to be named because he was not authorised to speak to media.
"I would buy Alba, because it is a big industry and fairly competitive, and Batelco, because of the telecom sector's defensive nature."
But analysts say poor liquidity is deterring many investors from going after the dividends in Bahrain. The market has traded just 478 million shares so far in 2012, compared to the 72.5 billion in Saudi Arabia, the Gulf's largest market.
Thin trading volumes make it hard for investors to accumulate enough of a stock to benefit from the dividends - and increase risks by making it difficult to get out of a stock if investors want to redeploy their money.
"Bahrain is an exceptionally illiquid market. There are some companies with good yields, like Batelco, but the problem is that it is so illiquid that to have a meaningful position is impossible," said Shahid Hameed, Global Investment House's head of asset management for the Gulf region.
"There are few interesting opportunities because the bank and the telecom spaces are mature, so there's not much growth there - there's not much happening in Bahrain from an equities point of view."
Batelco reported a 25 percent drop in profit for the first nine months of this year, as fierce competition led to a loss of market share as well as falling prices and revenues.
At some stage, valuations in Bahrain may fall so low that there appears to be little further downside in prices, making the high dividend yields even more attractive. But even then, regional investors may hesitate to enter the market while bigger markets nearby, such as Saudi Arabia, continue to boom.
"Trading has moved to Saudi Arabia - over 91 percent of the GCC's aggregate trading value has moved there," said the head of investment at an Oman-based investment firm.
"There's great value in some of the banks from a yield point of view, but Bahrain is seen as a mature ex-growth market." (Editing by Andrew Torchia)