Working Paper: CEPR ID: DP18657
Authors: Jan Mueller-Dethard; Niklas Reinhardt; Martin Weber
Abstract: It is a long-standing fact that retail investors largely consume dividends with previous studies estimating consumption rates of up to 75%. Using six different datasets, we show that dividend consumption rates have decreased substantially over time to less than 20%, today. Instead of consumption, we find reinvestments into securities portfolios of up to 80%. We provide evidence that this time trend is driven by the transition from checks to direct deposits for the payout of dividends. While it was easy and tempting to spend dividend checks in the past, today’s dividends sit in brokerage cash positions, waiting to be reinvested.
Keywords: dividend reinvestment; brokerage cash; choice architecture; mental accounting; default effects; retail investors; household finance
JEL Codes: D14; G11; G40; G41; G50; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transition from checks to direct deposits (J33) | decline in dividend consumption rates (G35) |
| direct deposits (G21) | dividends absorbed into brokerage cash positions (G35) |
| dividends absorbed into brokerage cash positions (G35) | less likely to be earmarked for consumption (E20) |
| increase in direct deposits (G28) | increase in reinvestment of dividends (G35) |
| account structures of brokerage accounts (G24) | facilitate reinvestment rather than consumption (E21) |
| implicit reinvestment through regular trading activities (G11) | more passive approach to managing dividend income (G35) |