[Good Morning Stock Market] "Investment in Dividend Growth Stocks Favorable Amid Slowing Market Momentum"

[Asia Economy Reporter Eunmo Koo] As the KOSPI faces increasing short-term downside risks due to fatigue from the sustained upward trend, weak foreign demand, and a slowdown in growth stock momentum, an analysis suggests that investing in dividend growth stocks is advantageous in preparing for a slowdown in the market's upward momentum.

◆Bongjoo Kang, Researcher at Meritz Securities=The Korean stock market has a higher likelihood of short-term declines due to fatigue from continuous gains without correction, weak foreign demand, and a slowdown in growth stock momentum. The fortunate aspect is that a gradual improvement in earnings is being confirmed. At this ambiguous point in the market direction, let's examine the investment environment for dividend stocks. In recent years, the expansion of stewardship code adoption and transitions to holding companies have increased the overall dividend yield and dividend size of the KOSPI.

Compared to overseas markets where the average payout ratio is over 30-40%, the dividend payout ratio of domestic listed companies remains relatively low. However, the slow but overall increase in payout ratios among individual stocks is a positive sign.

Dividend stock investment performance has been generally poor over the past few years. In particular, looking at the High Dividend 50 index, one of the representative dividend indices of the Korea Exchange, its returns have significantly underperformed the KOSPI since 2019. This is because the main components of the high dividend index are heavily weighted toward financial stocks, which underperformed compared to growth stock leaders such as IT, software, and healthcare sectors.

The Dividend Growth 50 index, which considers not only simple dividend yields but also the potential for earnings and dividend growth, is judged to be more favorable in the current market environment than the simple high dividend index. In fact, since March of this year, the dividend growth index's performance has slightly outpaced the KOSPI. In terms of total investment returns in the fourth quarter, since 2011, the dividend growth index has often outperformed the KOSPI.

◆Sangyoung Seo, Researcher at Kiwoom Securities=The Korean stock market declined yesterday amid concerns over the Nikola incident and global banking stocks. In particular, news related to Nikola triggered sell-offs in some thematic stock groups, leading to a significant drop in the KOSDAQ market. The decline factors in the U.S. stock market today are considered to have been pre-reflected in the Korean market yesterday, so the impact of U.S. market weakness on the Korean market is expected to be limited. Additionally, some large tech stocks that had been declining recently showed resilience as rebound buying emerged, which is favorable.

However, it is noteworthy that the QQQ ETF, which tracks the NASDAQ 100 index, saw an outflow of $3.5 billion in a single day?the highest since the IT bubble?indicating increased supply-demand instability. Considering that the market has been driven more by liquidity than corporate value, such capital outflows are likely to act as a factor dampening investor sentiment.

Especially given that the Federal Open Market Committee (FOMC) last week expressed caution regarding further liquidity expansion policies by the U.S. Federal Reserve (Fed), it is highly likely that the market will rapidly transition from a liquidity-driven phase to a fundamentals-driven phase. Moreover, with the Chuseok holiday approaching amid heightened uncertainty over the U.S. presidential election, profit-taking desires may increase, and volatility in the Korean stock market is expected to continue expanding.