[Practical Investment] Monthly Dividend ETFs, Cash Every Month? ... Consider Dividend Tax and Fees

Change Existing Dividend Payment Cycle to Monthly
Dividend Income Tax 15.4%... Distribution Amount May Decrease
Loss-Defense Products Like Covered Call Strategy Also Available
Fees Vary Greatly Depending on Product

[Asia Economy Reporter Hwang Yoon-joo] As the U.S. Federal Reserve's (Fed) aggressive tightening has caused extreme volatility in the stock market, monthly dividend exchange-traded funds (ETFs) are gaining popularity. This is because they provide a steady cash flow every month, like a paycheck. Nearly half of the monthly dividend ETFs were newly listed this year.

◆ Why the popularity of monthly dividend ETFs? ... Ability to secure cash flow = According to the Korea Exchange, there are currently 13 monthly dividend ETFs listed. Shinhan Asset Management opened the market. On June 21, it launched the ‘SOL U.S. S&P 500’ ETF. Its net asset size is 21 billion KRW. Monthly dividends have been paid three times on the 1st of each month since August.

Mirae Asset Management also moved quickly. In July, it changed the dividend payment cycle to the last business day of each month for four products: ‘TIGER U.S. Dow Jones 30’, ‘TIGER U.S. MSCI REITs (Synthetic H)’, ‘TIGER 200 Covered Call 5% OTM’, and ‘TIGER 200 Covered Call ATM’.

Last month, KB Asset Management and Samsung Asset Management also joined the monthly dividend ETF competition. KB Asset Management changed the dividend payment cycle of the ‘KBSTAR 200 High Dividend Covered Call ATM’ ETF to monthly. Dividends, which were paid once a year, will be paid monthly starting in September.

Samsung Asset Management launched a new ETF called ‘Samsung KODEX U.S. Dividend Premium Active’. This ETF is the first in Korea to simultaneously use U.S. high-quality dividend growth stocks and individual stock covered call strategies. In less than a month, its net asset size reached 33 billion KRW. It will pay dividends for the first time in November.

The reason monthly dividend ETFs have recently gained popularity is that they allow investors to secure cash flow. Since the beginning of this year, central banks worldwide have continued aggressive tightening policies, causing the stock market to perform very poorly. Since the start of the year, the KOSPI and KOSDAQ indices have fallen by 26.75% and 35.17%, respectively. Growth stocks like Naver and Kakao have been hitting 52-week lows daily, and leading export stocks are also struggling. During the same period, Samsung Electronics, the largest by market capitalization, dropped 30.27% from 78,300 KRW to 54,600 KRW. On the other hand, monthly dividend ETFs pay dividends every month. Even if the ETF price falls, dividends can partially offset losses.

A Shinhan Asset Management official said, "In times like these, when uncertainty persists and recession signals expand, it may be wise to seek relatively predictable investment returns from income (dividends, interest)." He added, "Dividends generated from investment assets can be quickly converted to cash, and it is an investment destination that can respond to new investment opportunities amid uncertainty."

◆ Criticism of monthly dividends as ‘Josam-mosa’... Considering dividend income tax and fees = The industry points out that there is a big illusion about monthly dividend ETFs. Contrary to expectations, the dividend amounts are very small, and taxes must also be considered. Fees vary greatly depending on the product. Especially in a continuing bear market, it is difficult to avoid losses.

The first thing to consider when investing in monthly dividend ETFs is dividend income tax. Dividend income tax is applied to dividends, with a rate of 15.4% (for amounts under 20 million KRW). Usually, dividends are paid quarterly or annually. When the payment cycle is changed to monthly, the dividend amount decreases. After taxes, the actual dividend received is said to be insignificant.

The monthly dividend ETF tracking the S&P 500 index is a representative example. The SOL U.S. S&P 500 ETF paid dividends of 11 KRW in August, 13 KRW in September, and 13 KRW in October. The dividend yield per share was 0.10%, 0.12%, and 0.12%, respectively. The KBSTAR 200 High Dividend Covered Call ATM paid 60 KRW in September, with a dividend yield per share of 0.81%.

An industry official said, "The annual dividend yield of the S&P 500 is around 1.5% to 2%," adding, "If the S&P 500 dividend is changed to monthly, it amounts to only 150,000 KRW." This means that to receive about 1 million KRW in dividends every month, a minimum investment of about 700 million KRW is required.

Especially, monthly dividend ETF products applying covered call strategies are appearing one after another, as a prolonged bear market is expected. Covered call refers to a method of trading stocks and options simultaneously. While holding stocks, call options (the right to buy stocks at a predetermined strike price) are continuously sold to generate income. If the stock price falls, the call option trading can help defend returns, and if the stock price rises, investors gain both capital gains and option premiums. The advantage is that losses can be managed relatively stably. However, in a weak market like recently, it is true that covered call products are also difficult to expect profits from.

Fees must also be considered. Generally, they range from 0.2% to 0.4%, but there are significant differences depending on the product. SOL U.S. S&P 500 has the lowest annual fee at 0.05%. The fact that it surpassed 30 billion KRW in assets within three months of launch is attributed to being the first monthly dividend product and having low fees. KODEX Dow Jones U.S. REITs (H) also has a relatively low fee of 0.09%.

On the other hand, ‘TIMEFOLIO Korea Plus Dividend Active’ has the highest fee at 0.80%, close to 1%. ‘TIGER Global Multi-Asset TIF Active’ also has a relatively high fee of 0.55%.