Why Dividends Matter

54 Pages Posted: 6 Jan 2023

Date Written: January 4, 2023


What matters to investors is not individual dividends but the commitment to pay the same or higher level of dividends for the foreseeable future. With this implicit contract the firm assures investors that “you can consume at the level of the dividend for the foreseeable future without fear of running out of money.” This is valuable information for shareholders who live off their assets and want to smooth consumption. The consumption smoothing explanation for dividends implies that firms act as if they have an implicit contract with investors, that investors consume out of dividends rather than capital gains, and that dividend paying stocks are held longer than other stocks. These predictions are confirmed in prior studies and in new tests in this paper.

Keywords: dividends, payout, repurchases, share buybacks

JEL Classification: G02, G30, G35

Suggested Citation

Schultz, Paul, Why Dividends Matter (January 4, 2023). Available at SSRN: https://ssrn.com/abstract=4317902 or http://dx.doi.org/10.2139/ssrn.4317902

Paul Schultz (Contact Author)

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

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