WisdomTree: Choi-nomics: South Korea Focuses on Higher Dividend Payouts

Which Stocks Are More Likely to Raise Dividends?

The companies that are slated to increase dividend payments will most likely be the ones that are large and liquid in nature, have strong cash balances and have low current payout ratios.

WisdomTree created an earnings-weighted index for Korea largely because the dividend payout ratios were some of the lowest in the world. The stocks with the most earnings and generally free cash flow outside of needs for capex are likely to be the ones increasing dividends—and we’d expect our earnings-weighted index to represent these opportunities well.

Within our broad dividend-based emerging market strategies, Korea has always received relatively little weight given its historically low dividend payout percentages, while Taiwan has been a relatively high-weighted country. That gap may be set to close in the coming years.

These bold moves by the South Korean government could be a game changer for the country’s equity markets in the years ahead. We wrote about the currency warning the central bank and finance minister issued earlier this summer, and since then the Korean won has started backing off its extreme highs. The combination of a weaker won and higher dividends could be a good boost for Korean equity shares. We’d advocate for looking at currency-hedged equities given the currency warnings stemming from Korea, along with a recent cut in interest rates by the Bank of Korea.

¹Source: Bloomberg, as of 7/28/14.
²Korea Daily, 7/23/14.
³Frances Yoon, “Korea Plans Dividend Boost,” IFR Asia, 8/2/14.
⁴Source: WisdomTree, Bloomberg, : UBS Quant Research, MSCI, IBES as of 7/25/2014
⁵Source: Bloomberg on MSCI Korea trailing dividend yield as of 8/1/14.