Investors seeking income should look at Korea

Income investors may want to take another look at Korea, says Song Jung-a in the FT.

Korea’s listed companies are notoriously stingy with their dividends, largely because the large family-run enterprises (chaebol) that dominate the economy tend to ignore smaller investors’ interests. Only 16% of last year’s profits will go to shareholders, compared to 46% in Hong Kong and 24% in Japan, according to CLSA, a brokerage. The Korean market yields just 1.3%; Japan and Australia offer 2% and 4.5% respectively.

But change is in the air. The government has changed the tax code to discourage firms from hoarding cash. There will now be tax incentives for higher dividends or wages, and retained earnings will be taxed if not used after three years. Market heavyweights Samsung and Hyundai plan to raise their 2014 dividend by 41% and 50% respectively. LG Electronics has doubled its payout.

Still, there’s a long way to go. Samsung is still only paying out 12.5% of 2014 earnings, while Apple’s payout ratio is 28%. And “it’s too early to say this is a turning point”, reckons Park Ju-geun of corporate watchdog CEO Score. We can’t be sure the chaebol are keen to boost dividends consistently. “It is hard to expect any big changes unless the governance structure gets overhauled.”

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