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Canada: Higher Dividend Payouts, A Boon For The Economy?

ByThe National Bank of Canada
Published 08/28/2012, 01:59 AM
Updated 05/14/2017, 06:45 AM

Bank of Canada Governor Mark Carney is sending a message to corporate Canada: rekindle those risktaking animal spirits or send the horde of cash sitting on the balance sheet back to investors. According to the Governor, “if they (the companies) can’t think of what to do with it, they should give it back to their shareholders.” As today’s Hot Chart shows, it is true that liquid assets are at a record 14% of total assets.

If companies are not doing enough to drive economic growth, would investors do a better job by redeploying higher dividend payouts? We are not so sure about this. Mutual fund data show that the percentage of dividend payment that is reinvested has swelled to 85% (from around 60% on the mid-1980s and the early 1990s) in the same funds. Taxation of dividends, risk aversion and the fact that financial assets are increasingly earmarked for retirement explains this phenomenon.

At the end of the day, the firepower of higher dividend payments on the real economy may not be all that large. Animal spirit, be that of corporations or investors is being tamed by both cyclical uncertainty and strong structural undercurrents.
Higher Dividend Payouts, A Boon For The Economy

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