[Personal Finance Barometer] Dividend Season, Separate Taxation, Volatile Market: Time to Focus on Dividend Stocks

KOSPI High Dividend 50 Index jumps more than 23% in one month
Interest in dividend stocks surges during the February dividend season
Need to build investment strategies for 'separate taxation on dividend income'
Dividend ETFs offer both high retu

Since the beginning of the year, dividend stocks and dividend exchange-traded funds (ETFs) have been performing well. Getty Images

Since the beginning of the year, dividend stocks and dividend exchange-traded funds (ETFs) have been performing well. This is believed to be due both to growing interest in dividend stocks as the dividend season begins, and to their appeal as defensive stocks amid rising volatility in the stock market. In particular, this year dividend stocks and dividend ETFs are expected to attract even more attention as they gain additional policy momentum from the introduction of separate taxation on dividend income.

According to the Korea Exchange on the 12th, as of the 10th, the KOSPI High Dividend 50 Index had risen 23.45% over the past month. The KRX-Akros High Dividend 20 Index climbed 26.0%. During the same period, the KOSPI gained 16.46%, meaning the high-dividend indices outperformed the KOSPI.

Noh Donggil, a researcher at Shinhan Investment & Securities, explained, "The strength in dividend stocks is the result of the dividend season overlapping with the earnings announcement season," adding, "On top of that, the reallocation of funds in response to volatility is another reason for the relative strength of dividend stocks."

Dividend disclosures concentrated in February... Policy momentum from 'separate taxation on dividend income'

February is the time when companies concentrate their dividend disclosures, and interest in dividend stocks increases. At the beginning of every year, annual results are finalized through the announcement of preliminary fourth-quarter results for the previous year, and dividend disclosures for year-end settlements are released one after another. Earnings announcements and dividend disclosures are particularly concentrated in February. Shin Hyunyong, a researcher at Yuanta Securities, said, "In the past, for year-end dividends, the dividend record dates were concentrated in December, and investment demand for dividend stocks was concentrated at year-end before dividend amounts were finalized," and added, "To resolve the so-called 'blind dividend' issue in 2023, improvements to the dividend process (setting the record date after the dividend amount is finalized) have been encouraged, and as a result, there are more cases where dividend disclosures precede the record date. Accordingly, interest in high-dividend stocks is being spread out from year-end into the beginning of the year."

Ex-dividend dates for annual year-end dividends are being spread out from December to between January and April, and dividend decision disclosures are being observed to act as share-price momentum. Shin said, "In February last year, it was confirmed that stocks which, through disclosures made before the ex-dividend date, locked in a dividend yield of 1% or more experienced share-price momentum for about 10 trading days," adding, "In this February dividend disclosure season, companies that follow a 'dividend amount first, record date later' process are seen as valid defensive alternatives amid a volatile market characterized by rotational trading."

In particular, this year a policy event, separate taxation on dividend income, has been added to the usual seasonal factors. Separate taxation on dividend income will apply to dividends paid on or after January 1, 2026. It covers cash dividends from domestically listed companies, including interim, quarterly, special, and year-end dividends. Stock dividends and in-kind dividends are excluded. Dividends from ETFs and REITs are not subject to separate taxation.

Because separate taxation applies when investors directly make net purchases of domestic stocks that qualify as high-dividend companies, the key is whether the investment targets meet the criteria for high-dividend companies. First, in all cases, the cash dividend in 2025 must not decrease compared with 2024. In addition, the company must either have a payout ratio of at least 40% in 2025, or have a payout ratio of at least 25% and increase its cash dividend by 10% or more compared with the previous year.

Noh said, "Because this structure can reduce the tax burden compared with the highest rate under global income taxation, the concentration of funds into companies eligible for separate taxation is the core of this dividend trade," and added, "Dividend strategies for February to March can be divided into three groups: companies that have already definitively met the conditions for separate taxation; companies that are highly likely to be included in the scope of separate taxation on dividends; and companies that do not yet meet the conditions but could be included through special dividends or expanded year-end dividends."

High-dividend ETFs also in the spotlight... Allowing diversified investment in dividend stocks

Dividend ETFs offer a variety of choices depending on investment strategy. These include high-dividend stock ETFs that bundle companies paying large dividends, and monthly dividend ETFs that provide steady monthly distributions by using bonds or derivatives such as covered calls, even if the underlying assets are not dividend stocks.

High-dividend stock ETFs listed in Korea are recording strong returns in addition to paying distributions. According to Koscom ETF Check, the high-dividend stock ETF with the highest return from the beginning of this year through the 11th was "HANARO Securities High Dividend TOP3 Plus (55.27%)." This ETF selects and invests in domestic securities firms that have both high dividend yields and high return on equity (ROE). Its main holdings include Mirae Asset Securities at 29.71%, Korea Financial Investment Holdings at 18.38%, and NH Investment & Securities at 16.84%. This ETF also began paying monthly distributions of 10 won per share starting in January. The second-best performer, "RISE Large Cap High Dividend 10 TR (34.64%)," focuses on 10 KOSPI large-cap stocks with high cash dividends. In particular, the "TR (total return)" type maximizes the compounding effect and defers the timing of taxation by automatically and immediately reinvesting the dividends generated.

Among monthly dividend ETFs, covered call ETFs with high average annual distribution rates are gaining popularity. Covered call ETFs can pay higher distributions than other types because they add the premiums earned from selling call options on the underlying assets to the dividends they pay. According to ETF Check, as of the previous day, all of the top 10 ETFs with the highest annual distribution rates were covered call ETFs. "SOL Palantir Covered Call OTM Bond Mixed" ranked first with 21.24%.

Kim Jinyoung, a researcher at Kiwoom Securities, advised, "For investors who are far from retirement, it is more important to grow assets by actively using high-dividend and dividend-growth ETFs than to consume the dividends directly," and added, "For investors in their 40s and 50s and older, 'capital preservation investing' becomes more important, so it is necessary to increase the allocation to monthly dividend-paying dividend stock ETFs and covered call ETFs, which can generate monthly cash flows while reducing principal volatility."