Those who invest in dividend-paying stocks are expected to get more returns than those who put a deposit in a savings account or installment savings account for the first time in South Korea this year. This is because banks are lowering their interest rates due to the basis for low interest and enterprises are increasing dividends thanks in part to good results and shareholder friendly policy. With companies’ net profit growth and stronger interest of shareholders as well as introduction of the stewardship code, Businesses will strengthen their stock dividend policy further in the future.
According to Eugene Investment & Securities on November 6, the average dividend yield ratio of Korean companies listed on the benchmark Korea Composite Stock Price Index (KOSPI) is expected to reach 2.3 percent this year. The figure is not so high compared to that of 10 years ago but the noteworthy part is the gap between banks’ interest rates. Currently, the benchmark rate of the Bank of Korea (BOK) is 1.25 percent, while the average interest rate of banks’ 3-year fixed term deposit and periodical deposits were 1.73 percent and 1.94 percent, respectively, as of September. It is the first time for KOSPI-listed firms’ annual dividend yield ratio to surpass banks’ interest rates on term deposit and periodical deposits this year.
The growth of dividends also exceeded the growth of companies’ results. Samsung Securities said enterprises’ results increased 4.4 percent a year on average in the last five years, while dividends grew 9.5 percent. Moreover, the net profit of companies listed on the KOSPI this year is estimated at 14.4 billion won (US$12.92 million), up 51.7 percent from the previous year. The net profit is the financial sources to pay out dividends.
As major companies, including Samsung Electronics, expanded dividend payouts, strengthening their shareholder friendly policy, the gap between dividend yield ratio and interest rates on term deposit and periodical deposits is highly likely to remain for the time being. Samsung Electronics’ dividend yield ratio stood at 1.3 percent last year but the figure is expected to reach 2.8 percent in 2020.
Companies that are expected to have more than 4 percent of dividend yield ratio this year include MERITZ Securities with an estimated dividend rate of 4.8 percent, S-Oil with 4.7 percent, Samsung Card with 4.4 percent, Industrial Bank of Korea with 4.1 percent and NH Investment & Securities with 4 percent. Hyosung, Doosan and SK Telecom are also expected to record a high dividend yield ratio of 3.8 percent to 3.9 percent.
In addition, the introduction of the stewardship code is highly likely to boost the dividend yield ratio. In some other countries that introduced the stewardship code before South Korea, like Japan, businesses tend to increase dividend payouts in an early implementation of the stewardship code.
The expansion of dividend payouts also encourages the inflow of capital to the stock market. In fact, foreign investors net purchased 8.4 trillion won (US$7.54 billion) worth of stocks on the KOSPI this year, while individual investors continued net sales to the contrary but are gradually increasing net purchases as the year is coming to an end. After hitting a new record high several times, the KOSPI closed at 2,549.41 on the 6th, down 8.56 points, or 0.33 percent, from the previous day but individual and foreign investors bought 180.9 billion won (US$162.31 million) and 144 billion won (US$129.21 million) worth of stocks, respectively.
However, foreign investors are stuffing their pockets with dividends as they led the growth of the stock market. Nearly half of dividends paid out by KOSPI 200 firms will go to foreigners this year. According to major securities companies, KOSPI 200 firms are expected to pay out an estimated cash dividend of 22 trillion won (US$19.74 billion) and 9.75 trillion won (US$8.75 billion) of them will be paid out to foreign investors. The figure accounts for 44.2 percent of the total dividends. The share of dividends paid out to foreigners in the total dividends on the stock market is on the rise. The figure recorded at 39.1 percent, or 6 trillion won (US$5.38 billion), in 2014, 38 percent, or 7.4 trillion won (US$6.64 billion), in 2015 and 41 percent, or 8.8 trillion won (US$7.9 billion), last year.
Meanwhile, the dividend yield ratio of companies listed on the secondary KOSDAQ bourse was 1.5 percent last year, which was lower than that of the KOSPI. The dividend yield ratio of the KOSPI-listed firms exceeded the earnings rate of treasury bonds for two years in a row from 2015 to 2016, while that of KOSDAQ-listed companies surpassed the earnings rate of treasury bonds for the first time last year. An official from the Korea Exchange said, “The rate of share increases of companies that paid out dividends for five consecutive years in the past five years stood at 126.7 percent last year and the figure surpassed 100 percent points of the rate of rise of KOSDAQ-listed companies over the same period. The companies listed on the KOSDAQ, which have steadily paid out cash dividends, saw their stock prices rapidly increase.”