Korea is set for a dividend windfall

Foreign investors have been piling into Korean stocks in the expectation of bigger payouts to shareholders.

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.

Recommended

Why investment forecasting is futile
Investment gurus

Why investment forecasting is futile

Every year events prove that forecasting is futile and 2020 was no exception, says Bill Miller, chairman and chief investment officer of Miller Value …
21 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021
US stocks are obviously in a bubble. But is it a rational bubble?
US stockmarkets

US stocks are obviously in a bubble. But is it a rational bubble?

Everyone wants to know if the US stockmarket is in a bubble. But that is the wrong question, says Merryn Somerset Webb. Of course it’s a bubble. The r…
14 Jan 2021

Most Popular

Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021
A simple way to profit from the next big trend change in the markets
Investment strategy

A simple way to profit from the next big trend change in the markets

Change is coming to the markets as the tech-stock bull market of the 2010s is replaced by a new cycle of rising commodity prices. John Stepek explains…
14 Jan 2021
Free 6 issue trial then continue to