Dividend indices are one of the most widely recognized factor-based strategies. According to Morningstar, as of Dec. 31, 2021, the number of dividend-focused exchange-traded products (ETPs) globally has reached 344, with over USD 385 billion in AUMs. In 2021, dividend ETPs drew close to USD 50 billion of assets inflow. In Korea, the dividend factor is the most popular factor, with over USD 642 million in AUMs, which accounted for 47% of the Korean factor ETP market.
In this paper, we will take a deep dive into the Korean dividend market and analyze how the Korean high dividend yield strategy has performed historically.
Korea Dividend Market
Unlike investors in the U.S., Korean investors face higher uncertainties when it comes to dividend payment. This is because, in Korea, the dividend ex-date is fixed to be the penultimate business day of the fiscal year-end and comes before the dividend announcement date.
Historically, Korean companies have been reluctant to pay out a dividend, preferring to keep the profit and reinvest. However, the Korean government has implemented a series of activities intended to induce companies to pay out more dividends over the past decade, which could encourage broader equity ownership, improve corporate governance and enhance shareholders’ rights. Therefore, throughout the past decade, the government has made various attempts to cultivate a dividend payment culture.
To guide institutional investors in effectively exercising their stewardship responsibilities, the Financial Services Commission (FSC) first introduced the Stewardship Code in 2015. In 2018, the nation’s largest institutional investor National Pension Service (NPS) took the lead in adopting the Stewardship Code, followed by other institutions. As of Aug. 31, 2022, 193 institutional investors participated in the Stewardship Code. As major stakeholders of Korean equities, these institutions could effectively influence companies to improve dividend policy and increase profit distribution.
Meanwhile, the government continued to provide a tax incentive to encourage payouts. During 2015-2017, the government lowered dividend tax from 14% to 9% for stockholders of qualified high-dividend companies. In 2022, the government proposed a 3% corporate tax cut to boost corporate income, which could end up benefiting dividend payouts. After years of efforts, a significant shift in the attitude toward dividends is beginning.
We have observed three major trends in the Korean dividend market over the past decade.
- Steady growth of dividend pool.
- Improved dividend sustainability.
- Increased adoption of interim dividend.
Steady Growth of Dividend Pool
Over the past 10 years, the Korean market has shown improvement in various aspects, indicating a shift toward a dividend payment culture. The size of the total dividend pool for companies in the S&P Korea BMI reached USD 43 billion in 2021, which is more than three times that in 2011 (see Exhibit 1). Its 10-year compound annual growth rate (CAGR) reached 12.4%—the highest among developed markets in the Asia Pacific region and greater than the global average of 6.9% (see Exhibit 2).