As March ushers in the season of so-called "cherry blossom dividends", dividend-oriented companies are rising in tandem. Inflows into dividend stocks are accelerating as an expansion in shareholder returns coincides with the introduction of separate taxation on dividend income.

South Korea's stock market has recently seen continued strength in sectors traditionally seen as dividend plays, such as finance and telecommunications.

That follows major listed companies announcing shareholder return policies in response to the government's corporate value enhancement programme. Investor sentiment is also being strongly boosted by the fact that tax cuts on dividend income apply starting with dividends received this year.

Under revisions to the Restriction of Special Taxation Act, shareholders of high-dividend listed companies can choose separate taxation benefits starting with dividends for the 2026 business year.

Companies eligible for the separate taxation benefit are those with a dividend payout ratio of 40 percent or more, or those whose payout ratio is up at least 25 percent from the previous year and whose dividend amount is up at least 10 percent from the previous year. To receive the tax benefit, disclosure of a corporate value enhancement plan will be mandatory.

Shareholders investing in these high-dividend listed companies will be subject to a single separate tax rate of up to 30 percent, instead of a progressive rate that had been as high as 45 percent when included in comprehensive taxation of financial income. A reduced tax rate of 9 percent will also apply to relatively small dividend income of 20 million won or less, down from 14 percent.

One of the main causes of the Korea discount, long cited as a chronic problem in South Korea's stock market, has been low dividend yields and the dividend taxation system.

For high-net-worth individuals, the tax burden rose sharply the more dividends they received, leaving little incentive to expand dividends, but this tax overhaul has laid an institutional foundation. Expectations that it will also raise after-tax returns for retail investors are driving steady inflows of money seeking to secure high-dividend stocks.

Brokerages cite financial stocks such as banks and securities firms, telecommunications stocks and major holding companies as the biggest beneficiaries of separate taxation on dividend income. That is because these sectors have outstanding earnings stability and are actively moving to raise shareholder return ratios, making it likely they will meet the high-dividend requirements.

Financial stocks have ample capacity to pay dividends, supported by solid earnings strength and easing burdens from setting aside provisions for real estate project financing (PF). Large financial holding companies such as KB Financial Group and Shinhan Financial Group are lifting total shareholder return ratios through continued dividend increases and large-scale cancellation of treasury shares.

According to the securities industry, KB Financial Group, BNK Financial Group and JB Financial Group are cementing their positions as defensive stocks by posting high expected dividend yields alongside stable results.

Telecoms stocks are also a major beneficiary sector. Telecoms companies such as KT and SK Telecom maintain high dividend payout ratios each year, based on their ability to generate stable free cash flow.

KT in particular is expected to post a dividend yield in the 5 percent range alongside improved profitability, and is assessed as a leading company that could provide separate taxation benefits.

Among holding companies, HD Hyundai, POSCO Holdings, GS and LX Holdings are cited as stocks of interest.

Major holding companies are expanding shareholder returns using resources such as dividends received from listed and unlisted subsidiaries. Alongside the corporate value enhancement trend, they are being revalued as they pursue active treasury share cancellations and cash dividends using cash on hand.

HD Hyundai is posting a solid dividend yield based on the performance of key subsidiaries, while KT&G is simultaneously pursuing treasury share cancellations to enhance shareholder value and a high-dividend policy. In the exchange-traded fund (ETF) market, inflows into high-dividend and value stock funds are also underpinning the strength of dividend stocks.

Dividend stocks are rising, but investors need to be selective. Rather than simply following stocks with high current dividend yields, they should check whether a company has the operating profit strength to sustain dividends over the medium to long term.

Experts stress that to fully benefit from separate taxation, companies must prove fundamentals that allow them to maintain the requirements for high-dividend listed firms. They also warn against a "dividend trap" in which a company's financial structure deteriorates due to excessive dividends.

Yeom Dong-chan (염동찬), a researcher at Korea Investment & Securities, said dividend stocks are showing strength as the rally in U.S. big tech slows. He said dividend stocks are also rising in South Korea as the impact of the dividend income tax cut adds to the trend.

He added that attention is needed on companies eligible for the dividend income tax cut where investors can still receive dividends even if they buy now.