Consuming Dividends

Abstract

This paper studies why investors buy dividend-paying assets and how they time their consumption accordingly to anticipated income. We combine administrative bank data linking customers' categorized consumption transactions and income to detailed portfolio and trading data and survey responses on financial behavior. We find that private consumption is excessively sensitive to dividend income. Investors across wealth, income and age distributions increase spending precisely around dividend receipt. Importantly, we find that consumption responses are driven by financially sophisticated investors who select dividend portfolios, anticipate dividend income, and plan consumption accordingly. Our results contribute to the literature on a dividend clientele and provide evidence of 'planned' excess sensitivity.

Keywords: Consumption, Stock market wealth, Dividends, Excess sensitivity, Self-control, Household finance, Retail investors

JEL Classification: G50, G40, G11, G15, D12, D14, D15