An Emerging Market With Dividend Growth Potential

There are several reasons why South Korea is one of investors' most favored emerging markets. First, Asia's fourth-largest economy is highly sophisticated, driven by technology and boasts statistics that put it on par with major developed markets.

Second, along with Taiwan, South Korea is one of the least volatile emerging markets. Volatility metrics confirm the iShares MSCI South Korea Capped ETF EWY is one of the least volatile single-country exchange traded funds track a developing economy. Said another way, EWY is, historically, significantly less volatile than its Brazil, India or Russia equivalents.

However, one thing South Korea has not been known for is dividends. There are several well-known emerging markets dividend ETFs trading in the U.S. and when these funds feature exposure to South Korea, that exposure is almost always of the token variety. EWY sports a trailing 12-month dividend yield 1.22 percent. Investors can do better with U.S. Treasurys. 

While South Korea's major conglomerates, also known as chaebols, have historically been stingy when it comes to dividends, they are also among the most cash-rich companies in Asia. Bolstering the potential of South Korea ETFs such as EWY to become dividend growth destinations in the future is the government's new found involvement in pressuring the chaebols to part with some of their cash in the form of shareholder rewards.

“As minority investors’ outrage gained momentum, tightly controlled chaebols were dissuaded from the continued hoarding practices through the introduction of a profits tax. Implemented by the Korean government in 2014, the measure saw headline dividends grow by 16.2% in the same year,” said Markit in a recent note. 

Investors looking to bet on South Korean dividend and won weakness should evaluate the Deutsche X-trackers MSCI South Korea Hedged Equity ETF DBKO and the WisdomTree Korea Hedged Equity Fund DXKW. Those ETFs will need see dividend growth among South Korean consumer discretionary names pickup because the energy and utilities allocations for those funds is light and those sectors are expected to be key drivers of South Korean payout growth.

“Government-linked companies have fuelled tremendous dividend growth in the past few years, however strong sector wide growth has also been seen. Oil & gas and utilities firms are expected to deliver exceptionally strong dividend growth; growing two-fold in 2015. Utilities dividend growth will be largely driven by two government-linked companies; Korea Electric Power Corp and Korea Gas Corp. Total dividends for these companies soared more than fivefold last year and expected to be KRW 1,500 and KRW 270 per share respectively,” said Markit.

DBKO allocates 4.5 percent of its combined weight to energy and utilities stocks. EWY has a combined 2.5 percent weight to those sectors.