South Korean investors are pouring money into funds that invest in dividend-paying stocks on hopes that a series of measures under review by the country's new finance minister will push local companies to increase dividend payouts, data showed Monday.
Dividend funds have received a net 302 billion won (US$293 million) this year as of Wednesday, while other stock funds suffered cash outflows during the cited period, according to the data compiled by fund evaluator KG Zeroin.
Local stock funds suffered an outflow of 3.48 trillion won during the stated period. But funds with dividend-paying stocks in their portfolio have soaked up investor money. In June alone, dividend funds posted an inflow of 221 billion won, the data showed.
Dividend funds, backed by the strong cash inflows, delivered decent returns to investors with a 7.44 percent gain this year, the second-highest after small-cap stock funds, which logged a whopping 11.6 percent return, the data showed.
Finance Minister Choi Kyung-hwan has repeatedly said that his ministry will unveil a set of measures to give tax breaks to companies that use surplus cash to increase dividend and wage payments.
Choi blamed local companies for sitting on too much cash, barring money from flowing into households' purses, which in turn weakens their spending.
"Dividend funds will attract more money down the road as local companies usually pay year-end dividends," said Kim Hu-jeong, an analyst at Tong Yang Securities. "Also, local companies are coming under growing pressure from foreign and institutional investors to increase dividends."
Local companies have been stingy in paying dividends, a key reason why South Korean stocks are undervalued. The latest data from the Korea Exchange show South Korea's dividend payout ratio at 22.4 percent, far below the average of 47.7 percent in other countries. The dividend yield ratio is 1.1 percent, compared with 2.7 percent overseas. The dividend yield ratio goes down as companies retain more cash.
South Korea's stock exchange operator is planning to adopt incentives within this year to encourage companies to increase their dividend payouts.
"South Korea's dividend payout ratio and dividend yield ratio are considerably low compared with foreign countries," KRX chairman Choi Kyoung-soo told reporters Friday. "We will be coming up with a number of different incentives to induce the companies to pay out more dividends and also develop new dividend indices that are marketable.
"Calls for changing the country's dividend practices have been endless," the KRX chief said. "With the stock index caught in a boxed range, we have to allow investors to make profit through dividends at least."