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Dispatches

Dividends Impact Consumption More Than Capital Gains Do

Changes in dividends impact household consumption. Capital gains also have an impact, but a smaller one than dividends. The magnitude of the impact depends on household wealth, with consumption rising proportionately higher among comparatively less affluent households.

Changes in dividends impact household consumption. Capital gains also have an impact, but a smaller one than dividends. The magnitude of the impact depends on household wealth, with consumption rising proportionately higher among comparatively less affluent households.

The findings are based on an analysis of Swedish households. Sweden was chosen because the country levied a wealth tax between 1999 and 2007. This provided the study’s authors with information about portfolio holdings, debt obligations and real estate transactions. Information on income, municipality of residence, demographics and wealth was also available. Households were categorized by wealth levels: bottom 5% to 50%, 50% to 70%, 70% to 90%, 90% to 95% and the top 95% to 100%.

Consumption was defined as the aftertax labor and financial asset income less interest payments, change in debt, change bank account balances, and savings and pension contributions.

Households whose wealth ranked in the bottom half consume $0.51 of every dollar of change in dividend income. They also react to capital gains, consuming about $0.33 for every dollar of capital gains.

At higher levels of wealth, the impact on consumption is smaller. A change in dividends led to about a $0.09 difference in consumption for the wealthiest 10% of households. Every dollar of capital gains was linked to between a $0.05 and $0.06 increase in consumption. Overall, as wealth increased, the proportionate effect dividends and capital gains had on consumption decreased.

One reason dividends may have a bigger impact on consumption than capital gains is how investors view them. Changes in dividend income are more persistent than changes in capital gains. As such, the reaction to the dividends would rationally be stronger if households viewed dividend income as being separate from capital gains income.

Households also do not necessarily sell their stocks to realize the capital gains. Rather, they adjust their savings rate. To the extent households are not selling stocks that have risen in price, the impact on consumption will be less than that of an increase in the amount of dividend income received.

“Stock Market Returns and Consumption,” Marco Di Maggio, Amir Kermani and Kaveh Majlesi; National Bureau of Economic Research working paper, January 2018.

Discussion

Joe Betz from NY posted over 8 years ago:

I have to think the conclusions of this article are largely self evident. To the degree anyone would use a significant portion of their capital gains for consumption is self defeating in that capital gains are largely one time events. Except for retirees who might depend on the sale of small portions of their retirement assets to carry them through retirement in the hope their assets are large enough and appreciate enough on a year to year basis to last a lifetime, few would follow this scenario. Most investors would use their dividends for consumption because in most cases they are recurring, not one time events the way capital gains are.


Joe Miller from Tennessee posted over 8 years ago:

This should be taught in journalism classes as "how to bury the lead." The issue of dividend vs. capital gains is interesting. But what is far more interesting is that the study this article reports on shows dramatically that the entire "Trickle Down" garbage is just that, garbage. In this case the truly poor are left out because they won't be owners of stocks. But among the lowest wealth group covered in the study $0.33 to $0.51 of every dollar they received was spent on consumption. Of the wealthiest group for every $1.00 increase in income the spending went up between $0.05 and $0.06. In other words the poorest group spent 5 to 10 times as much out of each increase in income as the wealthiest group did. This should demonstrate to any sane person that when the desire is to stimulate the economy the best way to do it is to put the money in the hands of the poorer members of society. Giving it to the wealthiest is a waste on tax dollars. The "job creators" are the people who spend money and buy things, and those are the poorer members of society.


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