Aggregate dividends and consumption smoothing

•We show how dividends, at the portfolio level, help increase the lifetime utility of an investor.•The investor uses counter-cyclical equity payouts to smooth consumption across the business cycle.•This is consistent with the observed negative correlation between changes in net aggregate dividends and GDP growth.•As the consumption smoothing motive strengthens, optimal aggregate payouts become more volatile and counter-cyclical.•These finding are robust to the presence and absence of agency conflicts.

We show that net equity payouts from the corporate sector play a crucial role in helping individuals manage their consumption path across the business cycle. In particular, we show that, as investors' desire to smooth consumption increases, optimal aggregate dividends become both more volatile and more counter-cyclical to help counterbalance pro-cyclical labor income. These findings are robust to whether or not agency conflicts exist in the economy.