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.

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