Investment Strategy2025-11-10
Dividend Income Separate Taxation Controversy: Impact Analysis on Dividend ETF Investment Strategy
South Korea's government proposal for separate taxation on dividend income has sparked controversy. It is now time for investors in US dividend ETFs (SCHD, VYM) to review their tax policy exposure and dividend investment strategies.
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At a National Assembly forum, critics raised concerns that the government's proposed separate taxation on dividend income is inequitable. The argument is that providing tax benefits exclusively to dividend-paying stocks is unfair, given that many growth-oriented companies like Amazon and Tesla pay no dividends at all. SCHD and VYM — two of the most popular US dividend ETFs among Korean investors — are products designed to pursue stable dividend income with tax efficiency. While Korea's dividend tax debate has no direct impact on these ETFs, it serves as an opportunity to reassess the relative attractiveness of dividend stocks versus growth stocks in the context of global dividend policy trends. Investors should review their dividend ETF versus growth ETF allocation using an asset allocation calculator and optimize after-tax returns using a rebalancing calculator.
Dividends vs. Growth: Comparing Investment Philosophies
Dividend stocks and growth stocks represent fundamentally different investment philosophies. Dividend stocks (SCHD, VYM) provide stable cash flow by distributing dividends quarterly, typically yielding 3–4% annually. They tend to be concentrated in defensive sectors — consumer staples, healthcare, and utilities — that maintain steady earnings even during economic slowdowns. This was demonstrated in 2022 during the rate hike cycle, when SCHD fell only -5% versus -18% for the S&P 500. When dividends are reinvested, the compounding effect tends to push long-term returns (20+ years) above market averages. Growth stocks (QQQ, TQQQ), by contrast, focus on capital appreciation and pay little to no dividends (0–1%). They are concentrated in innovative companies across technology, healthcare, and consumer sectors, offering high returns in bull markets. From 2023 to 2025, QQQ gained approximately +60% while SCHD returned around +25%, with growth stocks leading by a wide margin. However, growth stocks carry higher volatility and steeper drawdowns — in 2022, QQQ fell -32% while SCHD fell only -5%. Companies like Amazon and Tesla have delivered strong returns purely through price appreciation without ever paying a dividend.
SCHD vs. VYM: Comparing Dividend ETFs
SCHD (Schwab U.S. Dividend Equity ETF) and VYM (Vanguard High Dividend Yield ETF) are two of the most prominent US dividend ETFs. SCHD prioritizes dividend growth, selecting holdings based on at least 10 consecutive years of dividend increases, financial soundness, and dividend growth rate. It holds approximately 100 stocks in a concentrated portfolio, with sector weights of roughly 25% financials, 20% healthcare, 15% technology, and 15% consumer staples. Its dividend yield is approximately 3.5%, with an annual dividend growth rate of around 10%, meaning long-term holders see their effective yield rise quickly. For example, investors who bought in 2015 have seen their personal yield exceed 6% through the compounding effect. The expense ratio is a very low 0.06%, and since its inception in 2010, SCHD has delivered an average annual return of approximately +12%. VYM focuses on current dividend yield, drawing from the top ~440 highest-yielding stocks. Its portfolio is broadly diversified with sector weights of approximately 20% financials, 15% healthcare, 12% consumer staples, and 10% energy. Its dividend yield of around 3.0% is lower than SCHD's, but dividend growth is a steady 6% annually. The expense ratio is also 0.06%, and since its founding in 2006, VYM has averaged an annual return of approximately +9%. In terms of strategy: SCHD is well-suited for investors who prioritize dividend growth, while VYM is better for those who value current yield and broad diversification. Many investors hold both in a 50:50 blend to balance yield and growth.
Tax Efficiency of Dividend ETFs
US dividend ETFs carry both advantages and disadvantages from a tax perspective. Korean residents receiving dividends from US ETFs are subject to a 15% withholding tax in the United States, as well as Korean dividend income tax (15.4% including local tax; subject to comprehensive taxation for annual dividend income exceeding KRW 20 million). The US withholding tax can be partially recovered through the foreign tax credit, bringing the effective tax rate to roughly 15–25%. Dividend reinvestment does not provide tax deferral — dividends are taxed in the year received, which somewhat reduces the compounding effect. Capital gains from selling shares are subject to a capital gains tax (22% after a KRW 2.5 million exemption). Since dividends are taxed annually while capital gains from growth stocks can be deferred until the point of sale, growth stocks have a structural advantage from a tax deferral standpoint. That said, dividend stocks offer stable cash flow that can serve as living expenses in retirement; dividends continue to be paid even when stock prices decline, providing psychological stability during volatile periods; and high dividend growth rates — as with SCHD — can result in a sufficiently high yield over the long term to effectively offset the tax drag. For tax optimization: holding dividend ETFs in IRP or pension savings accounts defers dividend income tax and allows withdrawals at a lower rate (3.3–5.5%) during retirement; holding growth stocks (e.g., QQQ) in taxable accounts takes advantage of the KRW 2.5 million capital gains exemption and tax deferral; and blending dividend and growth exposure provides a balance between stability and tax efficiency.
Allocation Strategy: Dividend ETFs vs. Growth ETFs
The right allocation between dividend ETFs and growth ETFs depends on age and investment goals. In one's 40s during the wealth-accumulation phase, a suggested allocation is 70% growth ETFs (QQQ 40%, SPY 30%) and 30% dividend ETFs (SCHD 20%, VYM 10%) — using capital appreciation to grow assets rapidly while using dividends as a stabilizing supplement. In one's 50s during the transition phase, a 50/50 split between growth (SPY 30%, QQQ 20%) and dividend ETFs (SCHD 30%, VYM 20%) balances income and growth, with dividend reinvestment maximizing the compounding effect. In one's 60s approaching retirement, a suggested allocation is 30% growth ETFs (SPY 20%, QQQ 10%) and 70% dividend ETFs (SCHD 40%, VYM 30%) — using stable dividend income to cover living expenses, minimizing price volatility, and using dividend growth to hedge against inflation. In terms of market-environment adjustments: in bull markets (as in the current environment), overweight growth ETFs to capture momentum; during economic slowdowns or rising rate environments, shift toward dividend ETFs for defensiveness; when dividend yields are elevated (above 4%), consider receiving dividends in cash rather than reinvesting and redeploying into undervalued assets elsewhere.
Practical Rebalancing Strategy and Dividend Optimization
A rebalancing strategy for a dividend ETF-focused portfolio involves the following elements. For dividend reinvestment automation, set up DRIP (Dividend Reinvestment Plan) through your brokerage to automatically reinvest dividends, ensuring even small dividend amounts are put to work with minimal opportunity cost and maximizing compounding through fee-free reinvestment. For quarterly rebalancing, check your target allocation after each dividend payment period (March, June, September, December); if growth ETFs have appreciated significantly, sell a portion and add to dividend ETFs; and if your dividend ETF weighting deviates more than ±10% from target, rebalance. For tax efficiency, keep annual dividend income below KRW 20 million to avoid comprehensive taxation; excess dividends can be redirected to IRP or pension savings accounts, or converted to growth ETF holdings; and use year-end tax loss harvesting by selling loss positions to offset dividend income. As a practical example: assume a current portfolio of KRW 100 million (QQQ KRW 50M at +28%, SCHD KRW 30M at +10%, VYM KRW 20M at +8%). In November rebalancing, sell KRW 10 million of QQQ to realize gains (approximately KRW 2.2 million in profit), buy KRW 5 million of SCHD and KRW 5 million of VYM to reach the target allocation (40% growth, 60% dividend), and auto-reinvest annual dividends of approximately KRW 3.5 million (SCHD KRW 1.05M + VYM KRW 600K) to grow the effective yield from 3.5% to 3.7% by next year. Use a rebalancing calculator to determine exact buy/sell amounts, and use an asset allocation calculator to simulate total returns — combining dividend yield and price appreciation — to determine the optimal dividend-to-growth ratio.
Conclusion
The dividend income tax debate is an opportunity to reassess the relative attractiveness of dividend stocks versus growth stocks. Investors should adjust their allocation between dividend ETFs like SCHD and VYM and growth ETFs like QQQ based on their age and investment objectives, while developing an account allocation strategy and dividend reinvestment plan that accounts for tax efficiency. Use a rebalancing calculator to review your quarterly allocations, and use an asset allocation calculator to optimize your after-tax returns.
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