[Inside Chodong] Why Are Korean Companies Still Stingy with Dividends?

The scale of dividends distributed by domestic companies is clearly increasing. Last year, dividends paid by listed companies rose by 12% compared to the previous year. However, it is difficult to make a positive assessment based solely on this figure. Compared to major advanced markets, the dividend payout ratio remains significantly low, and most of last year’s increase was concentrated in the financial sector. Even among companies in the real economy, such as manufacturing, those with sufficient capacity to pay dividends are still reluctant to return profits to shareholders.

Why are Korean companies so stingy with dividends? There are several reasons: a corporate culture that prioritizes 'financial stability' over investor returns, global uncertainty, and an unsystematic decision-making structure regarding shareholder returns. This frugal approach to dividends has long been cited as an obstacle to Korea’s inclusion in the MSCI Developed Markets Index. Global investors, who prefer predictable dividend policies, point out that 'systematizing dividends' is a prerequisite for the Korean stock market to overcome the chronic Korea Discount. In Japan, which achieved capital market value-up ahead of Korea, companies were once reluctant to pay dividends but changed after the TOPIX reform and corporate governance improvements.

Some also criticize the structure that leaves dividend policy solely to corporate discretion. Although the government has actively promoted capital market advancement, institutional support for expanding dividends remains insufficient. For example, the '5% tax credit on increased dividends' included in the 2023 tax law amendment failed to pass the National Assembly. This measure was designed to provide certain tax benefits to companies that increase their dividends compared to the previous year.

Another point of discussion is the introduction of separate taxation for dividend income. Currently, if the combined dividend and interest income exceeds 20 million won, it is subject to comprehensive taxation at rates up to 45%. There are ongoing arguments within and outside the market that introducing separate taxation would increase the incentive for major shareholders to receive dividends and reduce taxes for individual investors, thereby encouraging their participation in the stock market.

Of course, there is room for criticism here. There are concerns that high-income investors could exploit this as a tax-saving measure, and that it could spark social controversy over tax fairness. In particular, some point out that large corporations with ample cash assets do not refrain from paying dividends due to a lack of tax incentives, but rather due to larger issues related to corporate governance. Furthermore, fiscal considerations from the perspective of national finances cannot be ignored.

Nevertheless, it is now time to stop postponing discussions on dividend policy for the advancement of the capital market. The issue of dividends is intertwined with structural problems facing the Korean capital market, such as the chronic Korea Discount, opaque corporate governance, and insufficient shareholder returns. Rather than expecting improvement solely through companies’ voluntary decisions, policy must play a more active catalytic role.

Moreover, an early presidential election is imminent. Just as every previous administration has introduced measures to boost the stock market, this time as well, Lee Jaemyung, the leading candidate from the Democratic Party, has pledged to usher in the 'KOSPI 5000' era. Kim Moonsu, the People Power Party candidate, has also promised to break out of the so-called 'Boxpi' by offering tax benefits to long-term stockholders or funds. The upcoming launch of a new administration will be a crucial turning point for the Korean stock market?not only for the advancement of the capital market, which is essential, but also for discussions on dividend policy as a key component. Dividend policy must be restructured within the broader framework of restoring trust in the capital market and enhancing corporate value.