Korea is set for a dividend windfall

Korean firms are “notorious for their insensitivity towards shareholder value”, says Song Jung-a in the Financial Times. But in one key area, that could be about to change – which is why foreign investors have been piling in, sending the benchmark Kospi index to a three-year high last week.

South Korea, whose exports account for 50% of GDP, is a good way to bet on global growth, which has gradually picked up this year. But the latest surge is down to hopes for a dividend payout windfall.

The government is trying to push through changes to the tax code, which are intended to discourage firms from hoarding cash. From next year, companies will be offered tax breaks if they raise dividends or wages.

Meanwhile, new retained earnings will be hit by a special tax if not used within three years. Dividend income tax on shareholders will also be cut.

This still requires parliamentary approval, as Bryan Song of Bank of America Merrill Lynch points out.

But this ‘carrot and stick’ approach could be a “game changer” for the market. Investors didn’t worry as much about dividends when companies were growing quickly.

But now that profit growth may be flattening out, income from dividends looks all the more appealing. What’s more, low dividend yields help to explain why South Korean firms trade at a discount to their global and regional rivals. The gap now looks likely to narrow.

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

MoneyWeek magazine

Latest issue:

Magazine cover
Bye bye Britain

Why the rich will leave

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


17 April 1961: America's ill-fated Bay of Pigs invasion begins

On this day in 1961, US troops landed in the Bay of Pigs on the south coast of Cuba in what would become a major embarrassment for America.

The Kids' Portfolio: the four best funds to buy for your children

Investing for your children's long-term future is an excellent idea. But what should you buy? The Kids' Portfolio is a simple collection of four funds intended to be tucked away for 20 to 40 years.