Does Dividend Policy Lead the Economy?

I investigate the predictive role of the aggregate dividend–payout ratio (de$\textit{de}$) for future economic activity. A vector‐autoregression‐based variance decomposition shows that the main driving force of de$\textit{de}$ is long‐run predictability of earnings growth, with dividend growth predictability assuming a secondary role. Consistent with this result, long‐horizon regressions indicate that de$\textit{de}$ is a significant predictor, especially at intermediate and long forecasting horizons, of future aggregate business conditions. Critically, de$\textit{de}$ outperforms several popular equity and bond predictors from the literature. The predictive ability of de$\textit{de}$ remains robust in an out‐of‐sample forecasting analysis. Overall, de$\textit{de}$ conveys important information about the economy.