The South Korean government came up with a tax law amendment on August 2. According to the amendment, tax incentives applied to the dividend income from high-dividend stocks are terminated at the end of this year as previously scheduled. Under the circumstances, an increasing number of investors are inquiring about the profitability of investment in high-dividend stocks.
The incentives were introduced at the end of 2014 so that those holding certain high-dividend stocks can be subject to a withholding tax rate of 9% instead of 14% and some tax credits can be applied to those with a financial income of at least 20 million won (US$18,000) a year. “The purpose of the incentives was to increase the incomes of households by means of dividends,” said an industry source, adding, “At the same time, it was to tackle the lower payout ratio of South Korean companies that hindered a rise in their stock prices.”
The incentives worked. According to the Korea Exchange, cash dividend payment by KOSPI-listed companies began to increase in 2013 and topped 20 trillion won (US$18 billion) for the first time late last year. 72% of 725 listed companies paid cash dividends last year whereas 66% of 729 listed companies did so in 2014. In addition, 95% of those that paid cash dividends in 2015 did so in 2016 as well. Likewise, KOSDAQ-listed companies increased their total cash dividend payment from 985.7 billion won (US$887 million) to 1.2615 trillion won (US$1.13 billion) between 2014 and last year with the number of KOSDAQ-listed companies paying dividends in cash increasing from 459 to 502. KOSPI’s dividend yield ratio exceeded the one-year government bond yield both in 2015 and 2016, when the stock market moved sideways.
The government’s plan to terminate the incentives in spite of their contribution to more dividend payment is because they have been criticized as a tax cut for rich shareholders and foreign investors. According to the Ministry of Strategy & Finance, 59% of the tax benefits based on the incentives, 770 billion won (US$693 million) or so, went to that group of investors in 2015 alone.
Some are pointing out that the Moon Jae-in administration is ignoring the positive effect of the incentives in order to distinguish itself from the previous government and this can have a negative impact on investors’ sentiment. According to Bloomberg data, KOSPI’s payout ratio was 19% as of the end of last year whereas the average of those constituting the MSCI Emerging Markets Index was 40%. “At present, South Korea has the lowest payout ratio among OECD member countries,” eBEST Investment & Securities research analyst Yeom Dong-chan pointed out, adding, “The termination of the incentives is likely to cause companies to refrain from increasing their dividend payments.”